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SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERALRESERVE SYSTEM

PART 220—CREDIT BY BROKERSAND DEALERS (REGULATION T)

Sec.220.1 Authority, purpose, and scope.220.2 Definitions.220.3 General provisions.220.4 Margin account.220.5 Special memorandum account.220.6 Good faith account.220.7 Broker-dealer credit account.220.8 Cash account.220.9 Clearance of securities, options, and

futures.220.10 Borrowing and lending securities.220.11 Requirements for the list of

marginable OTC stocks and the list offoreign margin stocks.

220.12 Supplement: margin requirements.

INTERPRETATIONS

220.101 Transactions of customers who arebrokers or dealers.

220.102 [Reserved]220.103 Borrowing of securities.220.104 [Reserved]220.105 Ninety-day rule in special cash ac-

count.220.106–220.107 [Reserved]220.108 International Bank Securities.220.109 [Reserved]220.110 Assistance by Federal credit union

to its members.220.111 Arranging for extensions of credit to

be made by a bank.220.112 [Reserved]220.113 Necessity for prompt payment and

delivery in special cash accounts.220.114–220.116 [Reserved]220.117 Exception to 90-day rule in special

cash account.220.118 Time of payment for mutual fund

shares purchased in a special cash ac-count.

220.119 Applicability of margin require-ments to credit extended to corporationin connection with retirement of stock.

220.120 [Reserved]220.121 Applicability of margin require-

ments to joint account between twocreditors.

220.122 ‘‘Deep in the money put and call op-tions’’ as extensions of credit.

220.123 Partial delayed issue contracts cov-ering nonconvertible bonds.

220.124 Installment sale of tax-shelter pro-grams as ‘‘arranging’’ for credit.

220.125–220.126 [Reserved]220.127 Independent broker/dealers arrang-

ing credit in connection with the sale ofinsurance premium funding programs.

220.128 Treatment of simultaneous long andshort positions in the same margin ac-count when put or call options or com-binations thereof on such stock are alsooutstanding in the account.

220.129–220.130 [Reserved]220.131 Application of the arranging section

to broker-dealer activities under SECRule 144A.

220.132 Credit to brokers and dealers.

AUTHORITY: 15 U.S.C. 78c, 78g, 78q, and 78w.

SOURCE: Regulation T, §§ 220.1 through220.18 appear at 48 FR 23165, May 24, 1983, un-less otherwise noted.

EDITORIAL NOTE: A copy of each form re-ferred to in this part is filed as a part of theoriginal document. Copies are available uponrequest to the Board of Governors of theFederal Reserve System or any Federal Re-serve Bank.

§ 220.1 Authority, purpose, and scope.

(a) Authority and purpose. RegulationT (this part) is issued by the Board ofGovernors of the Federal Reserve Sys-tem (the Board) pursuant to the Secu-rities Exchange Act of 1934 (the Act) (15U.S.C.78a et seq.). Its principal purposeis to regulate extensions of credit bybrokers and dealers; it also covers re-lated transactions within the Board’sauthority under the Act. It imposes,among other obligations, initial mar-gin requirements and payment rules oncertain securities transactions.

(b) Scope. (1) This part provides amargin account and four special pur-pose accounts in which to record all fi-nancial relations between a customerand a creditor. Any transaction notspecifically permitted in a special pur-pose account shall be recorded in amargin account.

(2) This part does not preclude anyexchange, national securities associa-tion, or creditor from imposing addi-tional requirements or taking actionfor its own protection.

(3) This part does not apply to:(i) Financial relations between a cus-

tomer and a creditor to the extent thatthey comply with a portfolio mar-gining system under rules approved oramended by the SEC;

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12 CFR Ch. II (1–1–00 Edition)§ 220.2

(ii) Credit extended by a creditorbased on a good faith determinationthat the borrower is an exempted bor-rower;

(iii) Financial relations between acustomer and a broker or dealer reg-istered only under section 15C of theAct; and

(iv) Financial relations between aforeign branch of a creditor and a for-eign person involving foreign securi-ties.

[Reg. T, 63 FR 2820, Jan. 16, 1998]

§ 220.2 Definitions.

The terms used in this part have themeanings given them in section 3(a) ofthe Act or as defined in this section asfollows:

Affiliated corporation means a cor-poration of which all the commonstock is owned directly or indirectly bythe firm or general partners and em-ployees of the firm, or by the corpora-tion or holders of the controlling stockand employees of the corporation, andthe affiliation has been approved bythe creditor’s examining authority.

Cash equivalent means securitiesissued or guaranteed by the UnitedStates or its agencies, negotiable bankcertificates of deposit, bankers accept-ances issued by banking institutions inthe United States and payable in theUnited States, or money market mu-tual funds.

Covered option transaction means anytransaction involving options or war-rants in which the customer’s risk islimited and all elements of the trans-action are subject to contemporaneousexercise if:

(1) The amount at risk is held in theaccount in cash, cash equivalents, orvia an escrow receipt; and

(2) The transaction is eligible for thecash account by the rules of the reg-istered national securities exchangeauthorized to trade the option or war-rant or by the rules of the creditor’sexamining authority in the case of anunregistered option, provided that allsuch rules have been approved oramended by the SEC.

Credit balance means the cash amountdue the customer in a margin accountafter debiting amounts transferred tothe special memorandum account.

Creditor means any broker or dealer(as defined in sections 3(a)(4) and 3(a)(5)of the Act), any member of a nationalsecurities exchange, or any person as-sociated with a broker or dealer (as de-fined in section 3(a)(18) of the Act), ex-cept for business entities controlling orunder common control with the cred-itor.

Current market value of:(1) A security means:(i) Throughout the day of the pur-

chase or sale of a security, the secu-rity’s total cost of purchase or the netproceeds of its sale including any com-missions charged; or

(ii) At any other time, the closingsale price of the security on the pre-ceding business day, as shown by anyregularly published reporting orquotation service. If there is no closingsale price, the creditor may use anyreasonable estimate of the marketvalue of the security as of the close ofbusiness on the preceding business day.

(2) Any other collateral means avalue determined by any reasonablemethod.

Customer excludes an exempted bor-rower and includes:

(1) Any person or persons actingjointly:

(i) To or for whom a creditor extends,arranges, or maintains any credit; or

(ii) Who would be considered a cus-tomer of the creditor according to theordinary usage of the trade;

(2) Any partner in a firm who wouldbe considered a customer of the firmabsent the partnership relationship;and

(3) Any joint venture in which a cred-itor participates and which would beconsidered a customer of the creditor ifthe creditor were not a participant.

Debit balance means the cash amountowed to the creditor in a margin ac-count after debiting amounts trans-ferred to the special memorandum ac-count.

Delivery against payment, Paymentagainst delivery, or a C.O.D. transactionrefers to an arrangement under which acreditor and a customer agree that thecreditor will deliver to, or accept from,the customer, or the customer’s agent,a security against full payment of thepurchase price.


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Federal Reserve System § 220.2

Equity means the total current mar-ket value of security positions held inthe margin account plus any credit bal-ance less the debit balance in the mar-gin account.

Escrow agreement means any agree-ment issued in connection with a callor put option under which a bank orany person designated as a control lo-cation under paragraph (c) of SEC Rule15c3–3 (17 CFR 240.15c3–3(c)), holdingthe underlying asset or required cashor cash equivalents, is obligated to de-liver to the creditor (in the case of acall option) or accept from the creditor(in the case of a put option) the under-lying asset or required cash or cashequivalent against payment of the ex-ercise price upon exercise of the call orput.

Examining authority means:(1) The national securities exchange

or national securities association ofwhich a creditor is a member; or

(2) If a member of more than one self-regulatory organization, the organiza-tion designated by the SEC as the ex-amining authority for the creditor.

Exempted borrower means a memberof a national securities exchange or aregistered broker or dealer, a substan-tial portion of whose business consistsof transactions with persons other thanbrokers or dealers, and includes a bor-rower who:

(1) Maintains at least 1000 active ac-counts on an annual basis for personsother than brokers, dealers, and per-sons associated with a broker or dealer;

(2) Earns at least $10 million in grossrevenues on an annual basis fromtransactions with persons other thanbrokers, dealers, and persons associ-ated with a broker or dealer; or

(3) Earns at least 10 percent of itsgross revenues on an annual basis fromtransactions with persons other thanbrokers, dealers, and persons associ-ated with a broker or dealer.

Exempted securities mutual fund meansany security issued by an investmentcompany registered under section 8 ofthe Investment Company Act of 1940 (15U.S.C. 80a-8), provided the company hasat least 95 percent of its assets con-tinuously invested in exempted securi-ties (as defined in section 3(a)(12) of theAct).

Foreign margin stock means a foreignsecurity that is an equity securitythat:

(1) Appears on the Board’s periodi-cally published List of Foreign MarginStocks; or

(2) Is deemed to have a ‘‘ready mar-ket’’ under SEC Rule 15c3–1 (17 CFR240.15c3–1) or a ‘‘no-action’’ positionissued thereunder.

Foreign person means a person otherthan a United States person as definedin section 7(f) of the Act.

Foreign security means a securityissued in a jurisdiction other than theUnited States.

Good faith with respect to:(1) Margin means the amount of mar-

gin which a creditor would require inexercising sound credit judgment;

(2) Making a determination or ac-cepting a statement concerning a bor-rower means that the creditor is alertto the circumstances surrounding thecredit, and if in possession of informa-tion that would cause a prudent personnot to make the determination or ac-cept the notice or certification withoutinquiry, investigates and is satisfiedthat it is correct.

Margin call means a demand by acreditor to a customer for a deposit ofadditional cash or securities to elimi-nate or reduce a margin deficiency asrequired under this part.

Margin deficiency means the amountby which the required margin exceedsthe equity in the margin account.

Margin equity security means a mar-gin security that is an equity security(as defined in section 3(a)(11) of theAct).

Margin excess means the amount bywhich the equity in the margin ac-count exceeds the required margin.When the margin excess is representedby securities, the current value of thesecurities is subject to the percentagesset forth in § 220.12 (the Supplement).

Margin security means:(1) Any security registered or having

unlisted trading privileges on a na-tional securities exchange;

(2) After January 1, 1999, any securitylisted on the Nasdaq Stock Market;

(3) Any non-equity security;(4) Any security issued by either an

open-end investment company or unitinvestment trust which is registered


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12 CFR Ch. II (1–1–00 Edition)§ 220.3

under section 8 of the Investment Com-pany Act of 1940 (15 U.S.C. 80a–8);

(5) Any foreign margin stock;(6) Any debt security convertible into

a margin security;(7) Until January 1, 1999, any OTC

margin stock; or(8) Until January 1, 1999, any OTC se-

curity designated as qualified for trad-ing in the national market systemunder a designation plan approved bythe Securities and Exchange Commis-sion (NMS security).

Money market mutual fund means anysecurity issued by an investment com-pany registered under section 8 of theInvestment Company Act of 1940 (15U.S.C. 80a–8) that is considered amoney market fund under SEC Rule2a–7 (17 CFR 270.2a–7).

Non-equity security means a securitythat is not an equity security (as de-fined in section 3(a)(11) of the Act).

Nonexempted security means any secu-rity other than an exempted security(as defined in section 3(a)(12) of theAct).

OTC margin stock means any equitysecurity traded over the counter thatthe Board has determined has the de-gree of national investor interest, thedepth and breadth of market, the avail-ability of information respecting thesecurity and its issuer, and the char-acter and permanence of the issuer towarrant being treated like an equitysecurity treaded on a national securi-ties exchange. An OTC stock is notconsidered to be an OTC margin stockunless it appears on the Board’s peri-odically published list of OTC marginstocks.

Payment period means the number ofbusiness days in the standard securi-ties settlement cycle in the UnitedStates, as defined in paragraph (a) ofSEC Rule 15c6–1 (17 CFR 240.15c6–1(a)),plus two business days.

Purpose credit means credit for thepurpose of:

(1) Buying, carrying, or trading in se-curities; or

(2) Buying or carrying any part of aninvestment contract security whichshall be deemed credit for the purposeof buying or carrying the entire secu-rity.

Short call or short put means a call op-tion or a put option that is issued, en-

dorsed, or guaranteed in or for an ac-count.

(1) A short call that is not cash-set-tled obligates the customer to sell theunderlying asset at the exercise priceupon receipt of a valid exercise noticeor as otherwise required by the optioncontract.

(2) A short put that is not cash-set-tled obligates the customer to purchasethe underlying asset at the exerciseprice upon receipt of a valid exercisenotice or as otherwise required by theoption contract.

(3) A short call or a short put that iscash-settled obligates the customer topay the holder of an in the money longput or long call who has, or has beendeemed to have, exercised the optionthe cash difference between the exer-cise price and the current assignedvalue of the option as established bythe option contract.

Underlying asset means:(1) The security or other asset that

will be delivered upon exercise of anoption; or

(2) In the case of a cash-settled op-tion, the securities or other assetswhich comprise the index or othermeasure from which the option’s valueis derived.

[Reg. T, 63 FR 2821, Jan. 16, 1998]

§ 220.3 General provisions.(a) Records. The creditor shall main-

tain a record for each account showingthe full details of all transactions.

(b) Separation of accounts—(1) In gen-eral. The requirements of one accountmay not be met by considering itemsin any other account. If withdrawals ofcash or securities are permitted underthis part, written entries shall be madewhen cash or securities are used forpurposes of meeting requirements inanother account.

(2) Exceptions. Notwithstanding para-graph (b)(1) of this section:

(i) For purposes of calculating the re-quired margin for a security in a mar-gin account, assets held in the goodfaith account pursuant to § 220.6(e)(1)(i)or (ii) may serve in lieu of margin;

(ii) Transfers may be effected be-tween the margin account and the spe-cial memorandum account pursuant to§§ 220.4 and 220.5.


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(c) Maintenance of credit. Except asprohibited by this part, any credit ini-tially extended in compliance with thispart may be maintained regardless of:

(1) Reductions in the customer’s eq-uity resulting from changes in marketprices;

(2) Any security in an account ceas-ing to be margin or exempted; or

(3) Any change in the margin require-ments prescribed under this part.

(d) Guarantee of accounts. No guar-antee of a customer’s account shall begiven any effect for purposes of thispart.

(e) Receipt of funds or securities. (1) Acreditor, acting in good faith, may ac-cept as immediate payment:

(i) Cash or any check, draft, or orderpayable on presentation; or

(ii) Any security with sight draft at-tached.

(2) A creditor may treat a security,check or draft as received upon writtennotification from another creditor thatthe specified security, check, or drafthas been sent.

(3) Upon notification that a check,draft, or order has been dishonored orwhen securities have not been receivedwithin a reasonable time, the creditorshall take the action required by thispart when payment or securities arenot received on time.

(4) To temporarily finance a cus-tomer’s receipt of securities pursuantto an employee benefit plan registeredon SEC Form S–8 or the withholdingtaxes for an employee stock awardplan, a creditor may accept, in lieu ofthe securities, a properly executed ex-ercise notice, where applicable, and in-structions to the issuer to deliver thestock to the creditor. Prior to accept-ance, the creditor must verify that theissuer will deliver the securitiespromptly and the customer must des-ignate the account into which the secu-rities are to be deposited.

(f) Exchange of securities. (1) To enablea customer to participate in an offer toexchange securities which is made toall holders of an issue of securities, acreditor may submit for exchange anysecurities held in a margin account,without regard to the other provisionsof this part, provided the considerationreceived is deposited into the account.

(2) If a nonmargin, nonexempted se-curity is acquired in exchange for amargin security, its retention, with-drawal, or sale within 60 days followingits acquisition shall be treated as if thesecurity is a margin security.

(g) Arranging for loans by others. Acreditor may arrange for the extensionor maintenance of credit to or for anycustomer by any person, provided thecreditor does not willfully arrangecredit that violates parts 221 or 224 ofthis chapter.

(h) Innocent mistakes. If any failure tocomply with this part results from amistake made in good faith in exe-cuting a transaction or calculating theamount of margin, the creditor shallnot be deemed in violation of this partif, promptly after the discovery of themistake, the creditor takes appropriatecorrective action.

(i) Foreign currency. (1) Freely con-vertible foreign currency may be treat-ed at its U.S. dollar equivalent, pro-vided the currency is marked-to-mar-ket daily.

(2) A creditor may extend credit de-nominated in any freely convertibleforeign currency.

(j) Exempted borrowers. (1) A memberof a national securities exchange or aregistered broker or dealer that hasbeen in existence for less than one yearmay meet the definition of exemptedborrower based on a six-month period.

(2) Once a member of a national secu-rities exchange or registered broker ordealer ceases to qualify as an exemptedborrower, it shall notify its lender ofthis fact before obtaining additionalcredit. Any new extensions of credit tosuch a borrower, including rollovers,renewals, and additional draws on ex-isting lines of credit, are subject to theprovisions of this part.

[Reg. T, 63 FR 2822, Jan. 16, 1998]

§ 220.4 Margin account.

(a) Margin transactions. (1) All trans-actions not specifically authorized forinclusion in another account shall berecorded in the margin account.

(2) A creditor may establish separatemargin accounts for the same personto:


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12 CFR Ch. II (1–1–00 Edition)§ 220.4

(i) Clear transactions for other credi-tors where the transactions are intro-duced to the clearing creditor by sepa-rate creditors; or

(ii) Clear transactions through othercreditors if the transactions arecleared by separate creditors; or

(iii) Provide one or more accountsover which the creditor or a thirdparty investment adviser has invest-ment discretion.

(b) Required margin—(1) Applicability.The required margin for each long orshort position in securities is set forthin § 220.12 (the Supplement) and is sub-ject to the following exceptions andspecial provisions.

(2) Short sale against the box. A shortsale ‘‘against the box’’ shall be treatedas a long sale for the purpose of com-puting the equity and the requiredmargin.

(3) When-issued securities. The re-quired margin on a net long or netshort commitment in a when-issued se-curity is the margin that would be re-quired if the security were an issuedmargin security, plus any unrealizedloss on the commitment or less any un-realized gain.

(4) Stock used as cover. (i) When ashort position held in the accountserves in lieu of the required marginfor a short put, the amount prescribedby paragraph (b)(1) of this section asthe amount to be added to the requiredmargin in respect of short sales shallbe increased by any unrealized loss onthe position.

(ii) When a security held in the ac-count serves in lieu of the requiredmargin for a short call, the securityshall be valued at no greater than theexercise price of the short call.

(5) Accounts of partners. If a partner ofthe creditor has a margin account withthe creditor, the creditor shall dis-regard the partner’s financial relationswith the firm (as shown in the part-ner’s capital and ordinary drawing ac-counts) in calculating the margin orequity of the partner’s margin account.

(6) Contribution to joint venture. If amargin account is the account of ajoint venture in which the creditor par-ticipates, any interest of the creditorin the joint account in excess of the in-terest which the creditor would haveon the basis of its right to share in the

profits shall be treated as an extensionof credit to the joint account and shallbe margined as such.

(7) Transfer of accounts. (i) A marginaccount that is transferred from onecreditor to another may be treated asif it had been maintained by the trans-feree from the date of its origin, if thetransferee accepts, in good faith, asigned statement of the transferor (or,if that is not practicable, of the cus-tomer), that any margin call issuedunder this part has been satisfied.

(ii) A margin account that is trans-ferred from one customer to another aspart of a transaction, not undertakento avoid the requirements of this part,may be treated as if it had been main-tained for the transferee from the dateof its origin, if the creditor accepts ingood faith and keeps with the trans-feree account a signed statement of thetransferor describing the cir-cumstances for the transfer.

(8) Sound credit judgment. In exer-cising sound credit judgment to deter-mine the margin required in good faithpursuant to § 220.12 (the Supplement),the creditor shall make its determina-tion for a specified security positionwithout regard to the customer’s otherassets or securities positions held inconnection with unrelated trans-actions.

(c) When additional margin is re-quired—(1) Computing deficiency. Alltransactions on the same day shall becombined to determine whether addi-tional margin is required by the cred-itor. For the purpose of computing eq-uity in an account, security positionsare established or eliminated and acredit or debit created on the tradedate of a security transaction. Addi-tional margin is required on any daywhen the day’s transactions create orincrease a margin deficiency in the ac-count and shall be for the amount ofthe margin deficiency so created or in-creased.

(2) Satisfaction of deficiency. The addi-tional required margin may be satis-fied by a transfer from the specialmemorandum account or by a depositof cash, margin securities, exemptedsecurities, or any combination thereof.

(3) Time limits. (i) A margin call shallbe satisfied within one payment period


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after the margin deficiency was cre-ated or increased.

(ii) The payment period may be ex-tended for one or more limited periodsupon application by the creditor to itsexamining authority unless the exam-ining authority believes that the cred-itor is not acting in good faith or thatthe creditor has not sufficiently deter-mined that exceptional circumstanceswarrant such action. Applications shallbe filed and acted upon prior to the endof the payment period or the expirationof any subsequent extension.

(4) Satisfaction restriction. Any trans-action, position, or deposit that is usedto satisfy one requirement under thispart shall be unavailable to satisfy anyother requirement.

(d) Liquidation in lieu of deposit. If anymargin call is not met in full withinthe required time, the creditor shallliquidate securities sufficient to meetthe margin call or to eliminate anymargin deficiency existing on the daysuch liquidation is required, whicheveris less. If the margin deficiency createdor increased is $1000 or less, no actionneed be taken by the creditor.

(e) Withdrawals of cash or securities.(1) Cash or securities may be with-drawn from an account, except if:

(i) Additional cash or securities arerequired to be deposited into the ac-count for a transaction on the same ora previous day; or

(ii) The withdrawal, together withother transactions, deposits, and with-drawals on the same day, would createor increase a margin deficiency.

(2) Margin excess may be withdrawnor may be transferred to the specialmemorandum account (§ 220.5) by mak-ing a single entry to that accountwhich will represent a debit to themargin account and a credit to the spe-cial memorandum account.

(3) If a creditor does not receive a dis-tribution of cash or securities which ispayable with respect to any security ina margin account on the day it is pay-able and withdrawal would not be per-mitted under this paragraph (e), awithdrawal transaction shall bedeemed to have occurred on the daythe distribution is payable.

(f) Interest, service charges, etc. (1)Without regard to the other provisionsof this section, the creditor, in its

usual practice, may debit the followingitems to a margin account if they areconsidered in calculating the balanceof such account:

(i) Interest charged on credit main-tained in the margin account;

(ii) Premiums on securities borrowedin connection with short sales or to ef-fect delivery;

(iii) Dividends, interest, or other dis-tributions due on borrowed securities;

(iv) Communication or shippingcharges with respect to transactions inthe margin account; and

(v) Any other service charges whichthe creditor may impose.

(2) A creditor may permit interest,dividends, or other distributions cred-ited to a margin account to be with-drawn from the account if:

(i) The withdrawal does not create orincrease a margin deficiency in the ac-count; or

(ii) The current market value of anysecurities withdrawn does not exceed 10percent of the current market value ofthe security with respect to which theywere distributed.

[Reg. T, 63 FR 2823, Jan. 16, 1998]

§ 220.5 Special memorandum account.(a) A special memorandum account

(SMA) may be maintained in conjunc-tion with a margin account. A singleentry amount may be used to representboth a credit to the SMA and a debit tothe margin account. A transfer be-tween the two accounts may be ef-fected by an increase or reduction inthe entry. When computing the equityin a margin account, the single entryamount shall be considered as a debitin the margin account. A payment tothe customer or on the customer’s be-half or a transfer to any of the cus-tomer’s other accounts from the SMAreduces the single entry amount.

(b) The SMA may contain the fol-lowing entries:

(1) Dividend and interest payments;(2) Cash not required by this part, in-

cluding cash deposited to meet a main-tenance margin call or to meet any re-quirement of a self-regulatory organi-zation that is not imposed by this part;

(3) Proceeds of a sale of securities orcash no longer required on any expiredor liquidated security position thatmay be withdrawn under § 220.4(e); and


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12 CFR Ch. II (1–1–00 Edition)§ 220.6

(4) Margin excess transferred fromthe margin account under § 220.4(e)(2).

[Reg. T, 63 FR 2824, Jan. 16, 1998]

§ 220.6 Good faith account.In a good faith account, a creditor

may effect or finance customer trans-actions in accordance with the fol-lowing provisions:

(a) Securities entitled to good faithmargin—(1) Permissible transactions. Acreditor may effect and finance trans-actions involving the buying, carrying,or trading of any security entitled to‘‘good faith’’ margin as set forth in§ 220.12 (the Supplement).

(2) Required margin. The requiredmargin is set forth in § 220.12 (the Sup-plement).

(3) Satisfaction of margin. Requiredmargin may be satisfied by a transferfrom the special memorandum accountor by a deposit of cash, securities enti-tled to ‘‘good faith’’ margin as setforth in § 220.12 (the Supplement), anyother asset that is not a security, orany combination thereof. An asset thatis not a security shall have a marginvalue determined by the creditor ingood faith.

(b) Arbitrage. A creditor may effectand finance for any customer bona fidearbitrage transactions. For the purposeof this section, the term ‘‘bona fide ar-bitrage’’ means:

(1) A purchase or sale of a security inone market together with an offsettingsale or purchase of the same securityin a different market at as nearly thesame time as practicable for the pur-pose of taking advantage of a dif-ference in prices in the two markets; or

(2) A purchase of a security which is,without restriction other than the pay-ment of money, exchangeable or con-vertible within 90 calendar days of thepurchase into a second security to-gether with an offsetting sale of thesecond security at or about the sametime, for the purpose of taking advan-tage of a concurrent disparity in theprices of the two securities.

(c) ‘‘Prime broker’’ transactions. Acreditor may effect transactions for acustomer as part of a ‘‘prime broker’’arrangement in conformity with SECguidelines.

(d) Credit to ESOPs. A creditor mayextend and maintain credit to em-

ployee stock ownership plans withoutregard to the other provisions of thispart.

(e) Nonpurpose credit. (1) A creditormay:

(i) Effect and carry transactions incommodities;

(ii) Effect and carry transactions inforeign exchange;

(iii) Extend and maintain secured orunsecured nonpurpose credit, subjectto the requirements of paragraph (e)(2)of this section.

(2) Every extension of credit, exceptas provided in paragraphs (e)(1)(i) and(e)(1)(ii) of this section, shall bedeemed to be purpose credit unless,prior to extending the credit, the cred-itor accepts in good faith from the cus-tomer a written statement that it isnot purpose credit. The statement shallconform to the requirements estab-lished by the Board.

[Reg. T, 63 FR 2824, Jan. 16, 1998]

§ 220.7 Broker-dealer credit account.

(a) Requirements. In a broker-dealercredit account, a creditor may effect orfinance transactions in accordancewith the following provisions.

(b) Purchase or sale of security againstfull payment. A creditor may purchaseany security from or sell any securityto another creditor or person regulatedby a foreign securities authority undera good faith agreement to promptly de-liver the security against full paymentof the purchase price.

(c) Joint back office. A creditor mayeffect or finance transactions of any ofits owners if the creditor is a clearingand servicing broker or dealer ownedjointly or individually by other credi-tors.

(d) Capital contribution. A creditormay extend and maintain credit to anypartner or stockholder of the creditorfor the purpose of making a capitalcontribution to, or purchasing stock of,the creditor, affiliated corporation oranother creditor.

(e) Emergency and subordinated credit.A creditor may extend and maintain,with the approval of the appropriateexamining authority:

(1) Credit to meet the emergencyneeds of any creditor; or


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(2) Subordinated credit to anothercreditor for capital purposes, if theother creditor:

(i) Is an affiliated corporation orwould not be considered a customer ofthe lender apart from the subordinatedloan; or

(ii) Will not use the proceeds of theloan to increase the amount of dealingin securities for the account of thecreditor, its firm or corporation or anaffiliated corporation.

(f) Omnibus credit (1) A creditor mayeffect and finance transactions for abroker or dealer who is registered withthe SEC under section 15 of the Act andwho gives the creditor written noticethat:

(i) All securities will be for the ac-count of customers of the broker ordealer; and

(ii) Any short sales effected will beshort sales made on behalf of the cus-tomers of the broker or dealer otherthan partners.

(2) The written notice required byparagraph (f)(1) of this section shallconform to any SEC rule on thehypothecation of customers’ securitiesby brokers or dealers.

(g) Special purpose credit. A creditormay extend the following types of cred-it with good faith margin:

(1) Credit to finance the purchase orsale of securities for prompt delivery,if the credit is to be repaid upon com-pletion of the transaction.

(2) Credit to finance securities intransit or surrendered for transfer, ifthe credit is to be repaid upon comple-tion of the transaction.

(3) Credit to enable a broker or dealerto pay for securities, if the credit is tobe repaid on the same day it is ex-tended.

(4) Credit to an exempted borrower.(5) Credit to a member of a national

securities exchange or registeredbroker or dealer to finance its activi-ties as a market maker or specialist.

(6) Credit to a member of a nationalsecurities exchange or registeredbroker or dealer to finance its activi-ties as an underwriter.

[Reg. T, 63 FR 2824, Jan. 16, 1998]

§ 220.8 Cash account.(a) Permissible transactions. In a cash

account, a creditor, may:

(1) Buy for or sell to any customerany security or other asset if:

(i) There are sufficient funds in theaccount; or

(ii) The creditor accepts in good faiththe customer’s agreement that the cus-tomer will promptly make full cashpayment for the security or asset be-fore selling it and does not con-template selling it prior to makingsuch payment;

(2) Buy from or sell for any customerany security or other asset if:

(i) The security is held in the ac-count; or

(ii) The creditor accepts in good faiththe customer’s statement that the se-curity is owned by the customer or thecustomer’s principal, and that it willbe promptly deposited in the account;

(3) Issue, endorse, or guarantee, orsell an option for any customer as partof a covered option transaction; and

(4) Use an escrow agreement in lieuof the cash, cash equivalents or under-lying asset position if:

(i) In the case of a short call or ashort put, the creditor is advised bythe customer that the required securi-ties, assets or cash are held by a personauthorized to issue an escrow agree-ment and the creditor independentlyverifies that the appropriate escrowagreement will be delivered by the per-son promptly; or

(ii) In the case of a call issued, en-dorsed, guaranteed, or sold on the sameday the underlying asset is purchasedin the account and the underlyingasset is to be delivered to a person au-thorized to issue an escrow agreement,the creditor verifies that the appro-priate escrow agreement will be deliv-ered by the person promptly.

(b) Time periods for payment; cancella-tion or liquidation. (1) Full cash payment.A creditor shall obtain full cash pay-ment for customer purchases:

(i) Within one payment period of thedate:

(A) Any nonexempted security waspurchased;

(B) Any when-issued security wasmade available by the issuer for deliv-ery to purchasers;

(C) Any ‘‘when distributed’’ securitywas distributed under a published plan;


14

12 CFR Ch. II (1–1–00 Edition)§ 220.9

(D) A security owned by the cus-tomer has matured or has been re-deemed and a new refunding security ofthe same issuer has been purchased bythe customer, provided:

(1) The customer purchased the newsecurity no more than 35 calendar daysprior to the date of maturity or re-demption of the old security;

(2) The customer is entitled to theproceeds of the redemption; and

(3) The delayed payment does not ex-ceed 103 percent of the proceeds of theold security.

(ii) In the case of the purchase of aforeign security, within one paymentperiod of the trade date or within oneday after the date on which settlementis required to occur by the rules of theforeign securities market, providedthis period does not exceed the max-imum time permitted by this part fordelivery against payment transactions.

(2) Delivery against payment. If a cred-itor purchases for or sells to a cus-tomer a security in a delivery againstpayment transaction, the creditor shallhave up to 35 calendar days to obtainpayment if delivery of the security isdelayed due to the mechanics of thetransaction and is not related to thecustomer’s willingness or ability topay.

(3) Shipment of securities, extension. Ifany shipment of securities is incidentalto consummation of a transaction, acreditor may extend the payment pe-riod by the number of days required forshipment, but not by more than oneadditional payment period.

(4) Cancellation; liquidation; minimumamount. A creditor shall promptly can-cel or otherwise liquidate a transactionor any part of a transaction for whichthe customer has not made full cashpayment within the required time. Acreditor may, at its option, disregardany sum due from the customer not ex-ceeding $1000.

(c) 90 day freeze. (1) If a nonexemptedsecurity in the account is sold or deliv-ered to another broker or dealer with-out having been previously paid for infull by the customer, the privilege ofdelaying payment beyond the tradedate shall be withdrawn for 90 calendardays following the date of sale of thesecurity. Cancellation of the trans-

action other than to correct an errorshall constitute a sale.

(2) The 90 day freeze shall not applyif:

(i) Within the period specified inparagraph (b)(1) of this section, fullpayment is received or any check ordraft in payment has cleared and theproceeds from the sale are not with-drawn prior to such payment or checkclearance; or

(ii) The purchased security was deliv-ered to another broker or dealer for de-posit in a cash account which holdssufficient funds to pay for the security.The creditor may rely on a writtenstatement accepted in good faith fromthe other broker or dealer that suffi-cient funds are held in the other cashaccount.

(d) Extension of time periods; transfers.(1) Unless the creditor’s examining au-thority believes that the creditor is notacting in good faith or that the cred-itor has not sufficiently determinedthat exceptional circumstances war-rant such action, it may upon applica-tion by the creditor:

(i) Extend any period specified inparagraph (b) of this section;

(ii) Authorize transfer to another ac-count of any transaction involving thepurchase of a margin or exempted secu-rity; or

(iii) Grant a waiver from the 90 dayfreeze.

(2) Applications shall be filed andacted upon prior to the end of the pay-ment period, or in the case of the pur-chase of a foreign security within theperiod specified in paragraph (b)(1)(ii)of this section, or the expiration of anysubsequent extension.

[Reg. T, 63 FR 2825, Jan. 16, 1998]

§ 220.9 Clearance of securities, options,and futures.

(a) Credit for clearance of securities.The provisions of this part shall notapply to the extension or maintenanceof any credit that is not for more thanone day if it is incidental to the clear-ance of transactions in securities di-rectly between members of a nationalsecurities exchange or association orthrough any clearing agency registeredwith the SEC.

(b) Deposit of securities with a clearingagency. The provisions of this part


15


shall not apply to the deposit of securi-ties with an option or futures clearingagency for the purpose of meeting thedeposit requirements of the agency if:

(1) The clearing agency:(i) Issues, guarantees performance

on, or clears transactions in, any secu-rity (including options on any security,certificate of deposit, securities indexor foreign currency); or

(ii) Guarantees performance of con-tracts for the purchase or sale of acommodity for future delivery or op-tions on such contracts;

(2) The clearing agency is registeredwith the Securities and Exchange Com-mission or is the clearing agency for acontract market regulated by the Com-modity Futures Trading Commission;and

(3) The deposit consists of any mar-gin security and complies with therules of the clearing agency that havebeen approved by the Securities andExchange Commission or the Com-modity Futures Trading Commission.

[Reg. T, 63 FR 2826, Jan. 16, 1998]

§ 220.10 Borrowing and lending securi-ties.

(a) Without regard to the other provi-sions of this part, a creditor may bor-row or lend securities for the purposeof making delivery of the securities inthe case of short sales, failure to re-ceive securities required to be deliv-ered, or other similar situations. If acreditor reasonably anticipates a shortsale or fail transaction, such borrowingmay be made up to one standard settle-ment cycle in advance of trade date.

(b) A creditor may lend foreign secu-rities to a foreign person (or borrowsuch securities for the purpose of re-lending them to a foreign person) forany purpose lawful in the country inwhich they are to be used.

(c) A creditor that is an exemptedborrower may lend securities withoutregard to the other provisions of thispart and a creditor may borrow securi-ties from an exempted borrower with-out regard to the other provisions ofthis part.

[Reg. T, 63 FR 2826, Jan. 16, 1998]

§ 220.11 Requirements for the list ofmarginable OTC stocks and the listof foreign margin stocks.

(a) Requirements for inclusion on thelist of marginable OTC stocks. Except asprovided in paragraph (f) of this sec-tion, OTC margin stock shall meet thefollowing requirements:

(1) Four or more dealers stand willingto, and do in fact, make a market insuch stock and regularly submit bonafide bids and offers to an automatedquotations system for their own ac-counts;

(2) The minimum average bid price ofsuch stock, as determined by theBoard, is at least $5 per share;

(3) The stock is registered under sec-tion 12 of the Act, is issued by an insur-ance company subject to section12(g)(2)(G) of the Act, is issued by aclosed-end investment managementcompany subject to registration pursu-ant to section 8 of the InvestmentCompany Act of 1940 (15 U.S.C. 80a-8), isan American Depository Receipt (ADR)of a foreign issuer whose securities areregistered under section 12 of the Act,or is a stock of an issuer required tofile reports under section 15(d) of theAct;

(4) Daily quotations for both bid andasked prices for the stock arecontinously available to the generalpublic;

(5) The stock has been publicly trad-ed for at least six months;

(6) The issuer has at least $4 millionof capital, surplus, and undivided prof-its;

(7) There are 400,000 or more shares ofsuch stock outstanding in addition toshares held beneficially by officers, di-rectors or beneficial owners of morethan 10 percent of the stock;

(8) There are 1,200 or more holders ofrecord, as defined in SEC Rule 12g5–1(17 CFR 240.12g5–1), of the stock whoare not officers, directors or beneficialowners of 10 percent or more of thestock, or the average daily trading vol-ume of such stock as determined by theBoard, is at least 500 shares; and

(9) The issuer or a predecessor in in-terest has been in existence for at leastthree years.

(b) Requirements for continued inclu-sion on the list of marginable OTC stocks.Except as provided in paragraph (f) of


16

12 CFR Ch. II (1–1–00 Edition)§ 220.11

this section, OTC margin stock shallmeet the following requirements:

(1) Three or more dealers stand will-ing to, and do in fact, make a marketin such stock and regularly submitbona fide bids and offers to an auto-mated quotations system for their ownaccounts;

(2) The minimum average bid price ofsuch stocks, as determined by theBoard, is at least $2 per share;

(3) The stock is registered as speci-fied in paragraph (a)(3) of this section;

(4) Daily quotations for both bid andasked prices for the stock are continu-ously available to the general public; ;

(5) The issuer has at least $1 millionof capital, surplus, and undivided prof-its;

(6) There are 300,000 or more shares ofsuch stock outstanding in addition toshares held beneficially by officers, di-rectors, or beneficial owners of morethan 10 percent of the stock; and

(7) There continue to be 800 or moreholders of record, as defined in SECRule 12g5–1 (17 CFR 240.12g5–1), of thestock who are not officers, directors, orbeneficial owners of 10 percent or moreof the stock, or the average daily trad-ing volume of such stock, as deter-mined by the Board, is at least 300shares.

(c) Requirements for inclusion on thelist of foreign margin stocks. Except asprovided in paragraph (f) of this sec-tion, a foreign security shall meet thefollowing requirements before beingplaced on the List of Foreign MarginStocks:

(1) The security is an equity securitythat is listed for trading on or throughthe facilities of a foreign securities ex-change or a recognized foreign securi-ties market and has been trading onsuch exchange or market for at leastsix months;

(2) Daily quotations for both bid andasked or last sale prices for the secu-rity provided by the foreign securitiesexchange or foreign securities marketon which the security is traded arecontinuously available to creditors inthe United States pursuant to an elec-tronic quotation system;

(3) The aggregate market value ofshares, the ownership of which is unre-stricted, is not less than $1 billion;

(4) The average weekly trading vol-ume of such security during the pre-ceding six months is either at least200,000 shares or $1 million; and

(5) The issuer or a predecessor in in-terest has been in existence for at leastfive years.

(d) Requirements for continued inclu-sion on the list of foreign margin stocks.Except as provided in paragraph (f) ofthis section, a foreign security shallmeet the following requirements to re-main on the List of Foreign MarginStocks:

(1) The security continues to meetthe requirements specified in para-graphs (c) (1) and (2) of this section;

(2) The aggregate market value ofshares, the ownership of which is unre-stricted, is not less than $500 million;and

(3) The average weekly trading vol-ume of such security during the pre-ceding six months is either at least100,000 shares or $500,000.

(e) Removal from the list. The Boardshall periodically remove from the listsany stock that:

(1) Ceases to exist or of which theissuer ceases to exist; or

(2) No longer substantially meets theprovisions of paragraphs (b) or (d) ofthis section or the definition of OTCmargin stock.

(f) Discretionary authority of Board.Without regard to other paragraphs ofthis section, the Board may add to, oromit or remove from the list ofmarginable OTC stocks and the list offoreign margin stocks an equity secu-rity, if in the judgment of the Board,such action is necessary or appropriatein the public interest.

(g) Unlawful representations. It shallbe unlawful for any creditor to make,or cause to be made, any representa-tion to the effect that the inclusion ofa security on the list of marginableOTC stocks or the list of foreign mar-gin stocks is evidence that the Boardor the SEC has in any way passed uponthe merits of, or given approval to,such security or any transactionstherein. Any statement in an adver-tisement or other similar communica-tion containing a reference to theBoard in connection with the lists or


17


stocks on those lists shall be an unlaw-ful representation.

[Reg. T, 63 FR 2826, Jan. 16, 1998]

§ 220.12 Supplement: margin require-ments.

The required margin for each secu-rity position held in a margin accountshall be as follows:

(a) Margin equity security, except foran exempted security, money marketmutual fund or exempted securitiesmutual fund, warrant on a securitiesindex or foreign currency or a long po-sition in an option: 50 percent of thecurrent market value of the security orthe percentage set by the regulatoryauthority where the trade occurs,whichever is greater.

(b) Exempted security, non-equity se-curity, money market mutual fund orexempted securities mutual fund: Themargin required by the creditor in goodfaith or the percentage set by the regu-latory authority where the trade oc-curs, whichever is greater.

(c) Short sale of a nonexempted secu-rity, except for a non-equity security:

(1) 150 percent of the current marketvalue of the security; or

(2) 100 percent of the current marketvalue if a security exchangeable orconvertible within 90 calendar dayswithout restriction other than the pay-ment of money into the security soldshort is held in the account, providedthat any long call to be used as marginin connection with a short sale of theunderlying security is an American-style option issued by a registeredclearing corporation and listed or trad-ed on a registered national securitiesexchange with an exercise price thatdoes not exceed the price at which theunderlying security was sold short.

(d) Short sale of an exempted secu-rity or non-equity security: 100 percentof the current market value of the se-curity plus the margin required by thecreditor in good faith.

(e) Nonmargin, nonexempted equitysecurity: 100 percent of the currentmarket value.

(f) Put or call on a security, certifi-cate of deposit, securities index or for-eign currency or a warrant on a securi-ties index or foreign currency:

(1) In the case of puts and calls issuedby a registered clearing corporation

and listed or traded on a registered na-tional securities exchange or a reg-istered securities association and reg-istered warrants on a securities indexor foreign currency, the amount, orother position specified by the rules ofthe registered national securities ex-change or the registered securities as-sociation authorized to trade the op-tion or warrant, provided that all suchrules have been approved or amendedby the SEC; or

(2) In the case of all other puts andcalls, the amount, or other position,specified by the maintenance rules ofthe creditor’s examining authority.

[Reg. T, 63 FR 2827, Jan. 16, 1998]

INTERPRETATIONS

§ 220.101 Transactions of customerswho are brokers or dealers.

The Board has recently consideredcertain questions regarding trans-actions of customers who are brokersor dealers.

(a) The first question was whetherdelivery and payment under § 220.4(f)(3)must be exactly simultaneous (such asin sight draft shipments), or whether itis sufficient if the broker-dealer cus-tomer, ‘‘as promptly as practicable inaccordance with the ordinary usage ofthe trade,’’ mails or otherwise deliversto the creditor a check in settlement ofthe transaction, the check being ac-companied by instructions for transferor delivery of the security. The Boardruled that the latter method of settingthe transaction is permissible.

(b) The second question was, in ef-fect, whether the limitations of§ 220.4(c)(8) apply to the account of acustomer who is himself a broker ordealer. The answer is that the provi-sion applies to any ‘‘special cash ac-count,’’ regardless of the type of cus-tomer.

(c) The third question was, in effect,whether a purchase and a sale of anunissued security under § 220.4(f)(3) maybe offset against each other, or wheth-er each must be settled separately bywhat would amount to delivery of thesecurity to settle one transaction andits redelivery to settle the other. Theanswer is that it is permissible to off-set the transactions against each other


18

12 CFR Ch. II (1–1–00 Edition)§ 220.102

without physical delivery and redeliv-ery of the security.

[11 FR 14155, Dec. 7, 1946]

§ 220.102 [Reserved]

§ 220.103 Borrowing of securities.(a) The Board of Governors has been

asked for a ruling as to whether§ 220.6(h), which deals with borrowingand lending of securities, applies to aborrower of securities if the lender is aprivate individual, as contrasted with amember of a national securities ex-change or a broker or dealer.

(b) Section 220.6(h) does not requirethat the lender of the securities in sucha case be a member of a national secu-rities exchange or a broker or dealer.Therefore, a borrowing of securitiesmay be able to qualify under the provi-sion even though the lender is a privateindividual, and this is true whether thesecurity is registered on a national se-curities exchange or is unregistered. Inborrowing securities from a private in-dividual under § 220.6(h), however, it be-comes especially important to bear inmind two limitations that are con-tained in the section.

(c) The first limitation is that thesection applies only if the broker bor-rows the securities for the purposespecified in the provision, that is, ‘‘forthe purpose of making delivery of suchsecurities in the case of short sales,failure to receive securities he is re-quired to deliver, or other similarcases’’. The present language of theprovision does not require that the de-livery for which the securities are bor-rowed must be on a transaction whichthe borrower has himself made, eitheras agent or as principal; he may borrowunder the provision in order to relendto someone else for the latter person tomake such a delivery. However, theborrowing must be related to an actualdelivery of the type specified—a deliv-ery in connection with a specific trans-action that has already occurred or isin immediate prospect. The provisiondoes not authorize a broker to borrowsecurities (or make the related deposit)merely in order that he or some otherbroker may have the securities ‘‘onhand’’ or may anticipate some needthat may or may not arise in the fu-ture.

(d) The ruling in the 1940 Federal Re-serve Bulletin, at page 647, is an exam-ple of a borrowing which, on the factsas given, did not meet the requirement.There, the broker wished to borrowstocks with the understanding that he‘‘would offer to lend this stock in the‘loan crowd’ on a national securitiesexchange.’’ There was no assurancethat the stocks would be used for thepurpose specified in § 220.6(h); theymight be, or they might merely be heldidle while the person lending thestocks had the use of the funds depos-ited against them. The ruling held ineffect that since the borrowing couldnot qualify under § 220.6(h) it mustcomply with other applicable provi-sions of the regulation.

(e) The second requirement is thatthe deposit of cash against the bor-rowed securities must be ‘‘bona fide.’’This requirement naturally cannot bespelled out in detail, but it requires atleast that the purpose of the broker inmaking the deposit should be to obtainthe securities for the specified purpose,and that he should not use the arrange-ment as a means of accommodating acustomer who is seeking to obtainmore funds than he could get in a gen-eral account.

(f) The Board recognizes that evenwith these requirements there is stillsome possibility that the provisionmay be misapplied. The Board is reluc-tant to impose additional burdens onlegitimate transactions by tighteningthe provision. If there should be evi-dence of abuses developing under theprovision, however, it would becomenecessary to consider making it morerestricted.

[12 FR 5278, Aug. 2, 1947]


§ 220.105 Ninety-day rule in specialcash account.

(a) Section 220.4(c)(8) places a limita-tion on a special cash account if a secu-rity other than an exempted securityhas been purchased in the account and‘‘without having been previously paidfor in full by the customer * * * hasbeen * * * delivered out to any brokeror dealer.’’ The limitation is that dur-ing the succeeding 90 days the cus-tomer may not purchase a security in


19


the account other than an exempted se-curity unless funds sufficient for thepurpose are held in the account. Inother words, the privilege of delayedpayment in such an account is with-drawn during the 90-day period.

(b) The Board recently considered aquestion as to whether the followingsituation makes an account subject tothe 90-day disqualification: A customerpurchases registered security ABC in aspecial cash account. The broker exe-cutes the order in good faith as a bonafide cash transaction, expecting to ob-tain full cash payment promptly. Thenext day, the customer sells registeredsecurity XYZ in the account, prom-ising to deposit it promptly in the ac-count. The proceeds of the sale areequal to or greater than the cost of se-curity ABC. After both sale and pur-chase have been made, the customer re-quests the broker to deliver securityABC to a different broker, to receivesecurity XYZ from that broker atabout the same time, and to settle withthe other broker—such settlement tobe made either by paying the cost ofsecurity XYZ to the other broker andreceiving from him the cost of securityABC, or by merely settling any dif-ference between these amounts.

(c) The Board expressed the view thatthe account becomes subject to the 90-day disqualification in § 220.4(c)(8). Inthe instant case, unlike that describedat 1940 Federal Reserve Bulletin 772,the security sold is not held in the ac-count and is not to be deposited in itunconditionally. It is to be obtainedonly against the delivery to the otherbroker of the security which had beenpurchased. Hence payment can not besaid to have been made prior to suchdelivery; the purchased security hasbeen delivered out to a broker withoutpreviously having been paid for in full,and the account becomes subject to the90-day disqualification.

[13 FR 2368, May 1, 1948]

§§ 220.106–220.107 [Reserved]

§ 220.108 International Bank Securi-ties.

(a) Section 2 of the Act of June 29,1949 (Pub. L. 142—81st Congress),amended the Bretton Woods Agree-

ments Act by adding a new sectionnumbered 15 providing, in part, that—

Any securities issued by InternationalBank for Reconstruction and Development(including any guaranty by the bank, wheth-er or not limited in scope), and any securi-ties guaranteed by the bank as to both prin-cipal and interest, shall be deemed to be ex-empted securities within the meaning of* * * paragraph (a)(12) of section 3 of the [Se-curities Exchange] Act of June 6, 1934, asamended (15 U.S.C. 78c). * * *.

(b) In response to inquiries with re-spect to the applicability of the marginrequirements of this part to securitiesissued or guaranteed by the Inter-national Bank for Reconstruction andDevelopment, the Board has repliedthat, as a result of this enactment, se-curities issued by the Bank are nowclassified as exempted securities under§ 220.2(e). Such securities are now in thesame category under this part as areUnited States Government, State andmunicipal bonds. Accordingly, the spe-cific percentage limitations prescribedby this part with respect to maximumloan value and margin requirementsare no longer applicable thereto.

[14 FR 5505, Sept. 7, 1949]


§ 220.110 Assistance by Federal creditunion to its members.

(a) An inquiry was presented recentlyconcerning the application of this partor part 221 of this subchapter, to a planproposed by a Federal credit union toaid its members in purchasing stock ofa corporation whose subsidiary appar-ently was the employer of all the creditunion’s members.

(b) From the information submitted,the plan appeared to contemplate thatthe Federal credit union would acceptorders from its members for registeredcommon stock of the parent corpora-tion in multiples of 5 shares; thatwhenever orders had been so receivedfor a total of 100 shares, the creditunion, as agent for such members,would execute the orders through abrokerage firm with membership on anational securities exchange; that thebrokerage firm would deliver certifi-cates for the stock, registered in thenames of the individual purchasers, tothe credit union against payment by


20

12 CFR Ch. II (1–1–00 Edition)§ 220.111

the credit union; that the credit unionwould prorate the total amount sopaid, including the brokerage fee,among the individual purchasers ac-cording to the number of shares pur-chased by them; and that a savings inbrokerage fee resulting from the 100-lotpurchases would be passed on by thecredit union to the individual pur-chasers of the stock. However, amountsof the stock less than 100 shares wouldbe purchased by the credit unionthrough the brokerage firm for anymembers willing to forego such sav-ings.

(c) It appeared further that the Fed-eral credit union members for whomstock was so purchased would reim-burse the credit union (1) by cash pay-ment, (2) by the proceeds of withdrawnshares of the credit union, (3) by theproceeds of an installment loan fromthe credit union collateraled by thestock purchased, or by (4) by a com-bination of two or more of the abovemethods. To assist the collection ofany such loan, the employer of thecredit union members would providepayroll deductions. Apparently, salesby the credit union of any of the stockpurchased by one of its members wouldoccur only in satisfaction of a delin-quent loan balance. In no case did itappear that the credit union wouldmake a charge for arranging the execu-tion of transactions in the stock for itsmembers.

(d) The Board was of the view that,from the facts as presented, it did notappear that the Federal credit unionshould be regarded as the type of insti-tution to which part 221 of this sub-chapter, in its present form, applied.

(e) With respect to this part, thequestion was whether the activities ofthe Federal credit union under the pro-posal, or otherwise, might be such as tobring it within the meaning of theterms ‘‘broker’’ or ‘‘dealer’’ as used inthe part and the Securities ExchangeAct of 1934. The Board observed thatthis, of course, was a question of factthat necessarily depended upon the cir-cumstances of the particular case, in-cluding the manner in which the ar-rangement in question might be car-ried out in practice.

(f) On the basis of the informationsubmitted, however, it did not appear

to the Board that the Federal creditunion should be regarded as being sub-ject to this part as a ‘‘broker or dealerwho transacts a business in securitiesthrough the medium of’’ a memberfirm solely because of its activities ascontemplated by the proposal in ques-tion. The Board stated that the partrather clearly would not apply if thereappeared to be nothing other thanloans by the credit union to its mem-bers to finance purchases made directlyby them of stock of the parent corpora-tion of the employer of the member-borrowers. The additional fact that thecredit union, as agent, would purchasesuch stock for its members (eventhough all such purchases might not befinanced by credit union loans) was notviewed by the Board as sufficient tomake the regulation applicable where,as from the facts presented, it did notappear that the credit union in anycase was to make any charge or receiveany compensation for assisting in suchpurchases or that the credit union oth-erwise was engaged in securities activi-ties. However, the Board stated thatmatters of this kind must be examinedclosely for any variations that mightsuggest the inapplicability of the fore-going.

[18 FR 4592, Aug. 5, 1953]

§ 220.111 Arranging for extensions ofcredit to be made by a bank.

(a) The Board has recently had occa-sion to express opinions regarding therequirements which apply when a per-son subject to this part (for conven-ience, called here simply a broker) ar-ranges for a bank to extend credit.

(b) The matter is treated generally in§ 220.7(a) and is also subject to the gen-eral rule of law that any person whoaids or abets a violation of law by an-other is himself guilty of a violation. Itmay be stated as a general principlethat any person who arranges for cred-it to be extended by someone else has aresponsibility so to conduct his activi-ties as not to be a participant in a vio-lation of this part, which applies tobrokers, or part 221 of this subchapter,which applies to banks.

(c) More specifically, in arranging anextension of credit that may be subjectto part 221 of this subchapter, a brokermust act in good faith and, therefore,


21


must question the accuracy of any non-purpose statement (i.e., a statementthat the loan is not for the purpose ofpurchasing or carrying registeredstocks) given in connection with theloan where the circumstances are suchthat the broker from any source knowsor has reason to know that the state-ment is incomplete or otherwise inac-curate as to the true purpose of thecredit. The requirement of ‘‘goodfaith’’ is of vital importance. While theapplication of the requirement willnecessarily vary with the facts of theparticular case, the broker, like thebank for whom the loan is arranged tobe made, must be alert to the cir-cumstances surrounding the loan.Thus, for example, if a broker or dealeris to deliver registered stocks to securethe loan or is to receive the proceeds ofthe loan, the broker arranging the loanand the bank making it would be puton notice that the loan would probablybe subject to part 221 of this sub-chapter. In any such circumstancesthey could not in good faith accept orrely upon a statement to the contrarywithout obtaining a reliable and satis-factory explanation of the situation.The foregoing, of course, applies theprinciples contained in § 221.101 of thissubchapter.

(d) In addition, when a broker is ap-proached by another broker to arrangeextensions of credit for customers ofthe approaching broker, the broker ap-proached has a responsibility not to ar-range any extension of credit which theapproaching broker could not himselfarrange. Accordingly, in such cases thestatutes and regulations forbid the ap-proached broker to arrange extensionsof credit on unregistered securities forthe purpose of purchasing or carryingeither registered or unregistered secu-rities. The approaching broker wouldalso be violating the applicable re-quirements if he initiated or otherwiseparticipated in any such forbiddentransactions.

(e) The expression of views, set forthin this section, to the effect that cer-tain specific transactions are forbid-den, of course, should not in any waybe understood to indicate approval ofany other transactions which are notmentioned.

[18 FR 5505, Sept. 15, 1953]


§ 220.113 Necessity for prompt pay-ment and delivery in special cashaccounts.

(a) The Board of Governors recentlyreceived an inquiry concerning whetherpurchases of securities by certain mu-nicipal employees’ retirement or pen-sion systems on the basis of arrange-ments for delayed delivery and pay-ment, might properly be effected by acreditor subject to this part in a spe-cial cash account under § 220.4(c).

(b) It appears that in a typical casethe supervisors of the retirement sys-tem meet only once or twice eachmonth, at which times decisions aremade to purchase any securities wishedto be acquired for the system. Al-though the securities are available forprompt delivery by the broker-dealerfirm selected to effect the system’spurchase, it is arranged in advancewith the firm that the system will notaccept delivery and pay for the securi-ties before some date more than sevenbusiness days after the date on whichthe securities are purchased. Appar-ently, such an arrangement is occa-sioned by the monthly or semimonthlymeetings of the system’s supervisors.It was indicated that a retirement sys-tem of this kind may be supervised byofficials who administer it as an inci-dental part of their regular duties, andthat meetings requiring joint action bytwo or more supervisors may be nec-essary under the system’s rules andprocedures to authorize issuance ofchecks in payment for the securitiespurchased. It was indicated also thatthe purchases do not involve exemptedsecurities, securities of the kind cov-ered by § 220.4(c)(3), or any shipment ofsecurities as described in § 220.4(c).

(c) This part provides that a creditorsubject thereto may not effect for acustomer a purchase in a special cashaccount under § 220.4(c) unless the useof the account meets the limitations of§ 220.4(a) and the purchase constitutes a‘‘bona fide cash transaction’’ whichcomplies with the eligibility require-ments of § 220.4(c)(1)(i). One such re-quirement is that the purchase bemade ‘‘in reliance upon an agreementaccepted by the creditor (broker-deal-er) in good faith’’ that the customer


22

12 CFR Ch. II (1–1–00 Edition)§§ 220.114–220.116

will ‘‘promptly make full cash pay-ment for the security, if funds suffi-cient for the purpose are not already inthe account; and, subject to certain ex-ceptions, § 220.4(c)(2) provides that thecreditor shall promptly cancel or liq-uidate the transaction if payment isnot made by the customer within sevenbusiness days after the date of pur-chase. As indicated in the Board’s in-terpretation at 1940 Federal ReserveBulletin 1172, a necessary part of thecustomer’s undertaking pursuant to§ 220.4(c)(1)(i) is that he ‘‘should havethe necessary means of payment read-ily available when he purchases a secu-rity in the special cash account. Heshould expect to pay for it imme-diately or in any event within the pe-riod (of not more than a very few days)that is as long as is usually required tocarry through the ordinary securitiestransaction.’’

(d) The arrangements for delayed de-livery and payment in the case pre-sented to the Board and outlined aboveclearly would be inconsistent with therequirement of § 220.4(c)(1)(i) that thepurchase be made in reliance upon anagreement accepted by the creditor ingood faith that the customer will‘‘promptly’’ make full cash paymentfor the security. Accordingly, theBoard said that transactions of thekind in question would not qualify as a‘‘bona fide cash transaction’’ and,therefore, could not properly be ef-fected in a special cash account, unlessa contrary conclusion would be justi-fied by the exception in § 220.4(c)(5).

(e) Section 220.4(c)(5) provides that ifthe creditor, ‘‘acting in good faith inaccordance with’’ § 220.4(c)(1), pur-chases a security for a customer ‘‘withthe understanding that he is to deliverthe security promptly to the customer,and the full cash payment is to bemade promptly by the customer is tobe made against such delivery’’, thecreditor may at his option treat thetransaction as one to which the periodapplicable under § 220.4(c)(2) is not theseven days therein specified but 35 daysafter the date of such purchase. It willbe observed that the application of§ 220.4 (c)(5) is specifically conditionedon the creditor acting in good faith inaccordance with § 220.4(c)(1). As notedabove, the existence of the arrange-

ments for delayed delivery and pay-ment in the case presented would pre-vent this condition from being met,since the customer could not be re-garded as having agreed to make fullcash payment ‘‘promptly’’. Further-more, such arrangements clearly wouldbe inconsistent with the requirementof § 220.4(c)(5) that the creditor ‘‘deliverthe security promptly to the cus-tomer’’.

(f) Section 220.4(c)(5) was discussed inthe Board’s published interpretation,referred to above, which states that ‘‘itis not the purpose of (§ 220.4 (c)(5)) toallow additional time to customers formaking payment. The ‘prompt deliv-ery’ described in (§ 220.4 (c)(5)) is deliv-ery which is to be made as soon as thebroker or dealer can reasonably makeit in view of the mechanics of the secu-rities business and the bona fide usagesof the trade. The provision merely rec-ognizes the fact that in certain cir-cumstances it is an established bonafide practice in the trade to obtain pay-ment against delivery of the securityto the customer, and the further factthat the mechanics of the trade, unre-lated to the customer’s readiness topay, may sometimes delay such deliv-ery to the customer’’.

(g) In the case presented, it appearsthat the only reason for the delay is re-lated solely to the customer’s readinessto pay and is in no way attributable tothe mechanics of the securities busi-ness. Accordingly, it is the Board’sview that the exception in § 220.4(c)(5)should not be regarded as permittingthe transactions in question to be ef-fected in a special cash account.

[22 FR 5954, July 27, 1957]

§§ 220.114–220.116 [Reserved]

§ 220.117 Exception to 90-day rule inspecial cash account.

(a) The Board of Governors has re-cently interpreted certain of the provi-sions of § 220.4(c)(8), with respect to thewithdrawal of proceeds of a sale ofstock in a ‘‘special cash account’’ whenthe stock has been sold out of the ac-count prior to payment for its pur-chase.

(b) The specific factual situation pre-sented may be summarized as follows:


23


Customer purchased stock in a special cashaccount with a member firm on Day 1. OnDay 3 customer sold the same stock at aprofit. On Day 8 customer delivered hischeck for the cost of the purchase to thecreditor (member firm). On Day 9 the cred-itor mailed to the customer a check for theproceeds of the sale.

(c) Section 220.4(c)(8) prohibits acreditor, as a general rule, from effect-ing a purchase of a security in a cus-tomer’s special cash account if any se-curity has been purchased in that ac-count during the preceding 90 days andhas then been sold in the account ordelivered out to any broker or dealerwithout having been previously paidfor in full by the customer. One excep-tion to this general rule reads as fol-lows:

* * * The creditor may disregard for thepurposes of this subparagraph (§ 220.4(c) (8)) asale without prior payment provided fullcash payment is received within the perioddescribed by subparagraph (2) of this para-graph (seven days after the date of purchase)and the customer has not withdrawn the pro-ceeds of sale on or before the day on whichsuch payment (and also final payment of anycheck received in that connection) is re-ceived. * * *

(d) Final payment of customer’scheck: (1) The first question is: When isthe creditor to be regarded as havingreceived ‘‘final payment of any checkreceived’’ in connection with the pur-chase?

(2) The clear purpose of § 220.4(c) (8) isto prevent the use of the proceeds ofsale of a stock by a customer to pay forits purchase—i.e., to prevent him fromtrading on the creditor’s funds by beingable to deposit the sale proceeds priorto presentment of his own check to thedrawee bank. Thus, when a customerundertakes to pay for a purchase bycheck, that check does not constitutepayment for the purchase, within thelanguage and intent of the above-quoted exception in § 220.4(c)(8), until ithas been honored by the drawee bank,indicating the sufficiency of his ac-count to pay the check.

(3) The phrase ‘‘final payment of anycheck’’ is interpreted as above notwith-standing § 220.6(f), which provides that:

For the purposes of this part (RegulationT), a creditor may, at his option (1) treat thereceipt in good faith of any check or draftdrawn on a bank which in the ordinary

course of business is payable on presen-tation, * * * as receipt of payment of theamount of such check, draft or order; * * *

This is a general provision substan-tially the same as language found insection 4(f) of Regulation T as origi-nally promulgated in 1934. The lan-guage of the subject exception to the90-day rule of § 220.4(c)(8), i.e., the ex-ception based expressly on final ‘‘pay-ment of any check,’’ was added to theregulation in 1949 by an amendment di-rected at a specific type of situation.Because the exception is a special,more recent provision, and because§ 220.6(f), if controlling, would permitthe exception to undermine, to someextent, the effectiveness of the 90-dayrule, sound principles of constructionrequire that the phrase ‘‘final paymentof any check’’ be given its literal andintended effect.

(4) There is no fixed period of timefrom the moment of receipt by thepayee, or of deposit, within which it iscertain that any check will be paid bythe drawee bank. Therefore, in the rarecase where the operation of the subjectexception to § 220.4(c)(8) is necessary toavoid application of the 90-day rule, acreditor should ascertain (from hisbank of deposit or otherwise) the factof payment of a customer’s check givenfor the purchase. Having so determinedthe day of final payment, the creditorcan permit withdrawal on any subse-quent day.

(e) Mailing as ‘‘withdrawal’’: (1) Alsopresented is the question whether themailing to the customer of the credi-tor’s check for the sale proceeds con-stitutes a withdrawal of such proceedsby the customer at the time of mailingso that, if the check for the sale pro-ceeds is mailed on or before the day onwhich the customer’s check for thepurchase is finally paid, the 90-day ruleapplies. It may be that a check mailedone day will not ordinarily be receivedby the customer until the next. TheBoard is of the view, however, thatwhen the check for sale proceeds isissued and released into the mails, theproceeds are to be regarded as with-drawn by the customer; a more liberalinterpretation would open a way forcircumvention. Accordingly, the credi-tor’s check should not be mailed northe sale proceeds otherwise released to


24

12 CFR Ch. II (1–1–00 Edition)§ 220.118

the customer ‘‘on or before the day’’ onwhich payment for the purchase, in-cluding final payment of any checkgiven for such payment, is received bythe creditor, as determined in accord-ance with the principles stated herein.

(2) Applying the above principles tothe schedule of transactions describedin the second paragraph of this inter-pretation, the mailing of the creditor’scheck on ‘‘Day 9’’ would be consistentwith the subject exception to§ 220.4(c)(8), as interpreted herein, onlyif the customer’s check was paid by thedrawee bank on ‘‘Day 8’’.

[27 FR 3511, Apr. 12, 1962]

§ 220.118 Time of payment for mutualfund shares purchased in a specialcash account.

(a) The Board has recently consideredthe question whether, in connectionwith the purchase of mutual fundshares in a ‘‘special cash account’’under the provisions of this part 220,the 7-day period with respect to liq-uidation for nonpayment is that de-scribed in § 220.4(c)(2) or that describedin § 220.4(c)(3).

(b) Section 220.4(c)(2) provides as fol-lows:

In case a customer purchases a security(other than an exempted security) in the spe-cial cash account and does not make fullcash payment for the security within 7 daysafter the date on which the security is sopurchased, the creditor shall, except as pro-vided in subparagraphs (3)–(7) of this para-graph, promptly cancel or otherwise liq-uidate the transaction or the unsettled por-tion thereof.

Section 220.4(c)(3), one of the excep-tions referred to, provides in relevantpart as follows:

If the security when so purchased is anunissued security, the period applicable tothe transaction under subparagraph (2) ofthis paragraph shall be 7 days after the dateon which the security is made available bythe issuer for delivery to purchasers.

(c) In the case presented, the sharesof the mutual fund (open-end invest-ment company) are technically notissued at the time they are sold by theunderwriter and distributor. Severaldays may elapse from the date of salebefore a certificate can be delivered bythe transfer agent. The specific inquiry

to the Board was, in effect, whether the7-day period after which a purchasetransaction must be liquidated or can-celled for nonpayment should run, inthe case of mutual fund shares, fromthe time when a certificate for the pur-chased shares is available for deliveryto the purchaser, instead of from thedate of the purchase.

(d) Under the general rule of § 220.4(c)(2) that is applicable to purchases ofoutstanding securities, the 7-day periodruns from the date of purchase withoutregard to the time required for the me-chanical acts of transfer of ownershipand delivery of a certificate. This ruleis based on the principles governing theuse of special cash accounts in accord-ance with which, in the absence of spe-cial circumstances, payment is to bemade promptly upon the purchase ofsecurities.

(e) The purpose of § 220.4(c)(3) is torecognize the fact that, when an issueof securities is to be issued at somefixed future date, a security that is apart of such issue can be purchased ona ‘‘when-issued’’ basis and that pay-ment may reasonably be delayed untilafter such date of issue, subject toother basic conditions for transactionsin a special cash account. Thus,unissued securities should be regardedas ‘‘made available for delivery to pur-chasers’’ on the date when they aresubstantially as available as out-standing securities are available uponpurchase, and this would ordinarily bethe designated date of issuance or, inthe case of a stock dividend, the ‘‘pay-ment date’’. In any case, the time re-quired for the mechanics of transferand delivery of a certificate is not ma-terial under § 220.4(c)(3) any more thanit is under § 220.4(c)(2).

(f) Mutual fund shares are essentiallyavailable upon purchase to the sameextent as outstanding securities. Themechanics of their issuance and of thedelivery of certificates are not signifi-cantly different from the mechanics oftransfer and delivery of certificates forshares of outstanding securities, andthe issuance of mutual fund shares isnot a future event in a sense thatwould warrant the extension of thetime for payment beyond that affordedin the case of outstanding securities.Consequently, the Board has concluded


25


that a purchase of mutual fund sharesis not a purchase of an ‘‘unissued secu-rity’’ to which § 220.4(c)(3) applies, butis a transaction to which § 220.4(c)(2)applies.

[27 FR 10885, Nov. 8, 1962]

§ 220.119 Applicability of margin re-quirements to credit extended tocorporation in connection with re-tirement of stock.

(a) The Board of Governors has beenasked whether part 220 was violatedwhen a dealer in securities transferredto a corporation 4,161 shares of thestock of such corporation for a consid-eration of $33,288, of which only 10 per-cent was paid in cash.

(b) If the transaction was of a kindthat must be included in the corpora-tion’s ‘‘general account’’ with the deal-er (§ 220.3), it would involve an exces-sive extension of credit in violation of§ 220.3 (b)(1). However, the transactionwould be permissible if the transactioncame within the scope of § 220.4(f)(8),which permits a ‘‘creditor’’ (such asthe dealer) to ‘‘Extend and maintaincredit to or for any customer withoutcollateral or on any collateral what-ever for any purpose other than pur-chasing or carrying or trading in secu-rities.’’ Accordingly, the crucial ques-tion is whether the corporation, in thistransaction, was ‘‘purchasing’’ the 4,161shares of its stock, within the meaningof that term as used in this part.

(c) Upon first examination, it mightseem apparent that the transactionwas a purchase by the corporation.From the viewpoint of the dealer thetransaction was a sale, and ordinarily,at least a sale by one party connotes apurchase by the other. Furthermore,other indicia of a sale/purchase trans-action were present, such as a transferof property for a pecuniary consider-ation. However, when the underlyingobjectives of the margin regulationsare considered, it appears that they donot encompass a transaction of this na-ture, where securities are transferredon credit to the issuer thereof for thepurpose of retirement.

(d) Section 7(a) of the Securities Ex-change Act of 1934 requires the Boardof Governors to prescribe margin regu-lations ‘‘For the purpose of preventingthe excessive use of credit for the pur-

chase or carrying of securities.’’ Ac-cordingly, the provisions of this partare not intended to prevent the use ofcredit where the transaction will nothave the effect of increasing the vol-ume of credit in the securities mar-kets.

(e) It appears that the instant trans-action would have no such effect. Whenthe transaction was completed, the eq-uity interest of the dealer was trans-muted into a dollar-obligation interest;in lieu of its status as a stockholder ofthe corporation, the dealer became acreditor of that corporation. The cor-poration did not become the owner ofany securities acquired through the useof credit; its outstanding stock wassimply reduced by 4,161 shares.

(f) The meaning of ‘‘sale’’ and ‘‘pur-chase’’ in the Securities Exchange Acthas been considered by the Federalcourts in a series of decisions dealingwith corporate ‘‘insiders’’ profits undersection 16(b) of that Act. Although thestatutory purpose sought to be effec-tuated in those cases is quite differentfrom the purpose of the margin regula-tions, the decisions in question supportthe propriety of not regarding a trans-action as a ‘‘purchase’’ where this ac-cords with the probable legislative in-tent, even though, literally, the statu-tory definition seems to include theparticular transaction. See Roberts v.Eaton (CA 2 1954) 212 F. 2d 82, and casesand other authorities there cited. Thegoverning principle, of course, is to ef-fectuate the purpose embodied in thestatutory or regulatory provision beinginterpreted, even where that purposemay conflict with the literal words.U.S. v. Amer. Trucking Ass’ns, 310 U.S.534, 543 (1940); 2 Sutherland, StatutoryConstruction (3d ed. 1943) ch. 45.

(g) There can be little doubt that anextension of credit to a corporation toenable it to retire debt securities wouldnot be for the purpose of ‘‘pur-chasing * * * securities’’ and thereforewould come within § 220.4(f)(8), regard-less of whether the retirement wasobligatory (e.g., at maturity) or was avoluntary ‘‘call’’ by the issuer. This istrue, it is difficult to see any valid dis-tinction, for this purpose, between (1)voluntary retirement of an indebted-ness security and (2) voluntary retire-ment of an equity security.


26

12 CFR Ch. II (1–1–00 Edition)§ 220.120

(h) For the reasons indicated above,it is the opinion of the Board of Gov-ernors that the extension of credit hereinvolved is not of the kind which themargin requirements are intended toregulate and that the transaction de-scribed does not involve an unlawfulextension of credit as far as this part isconcerned.

(i) The foregoing interpretation re-lates, of course, only to cases of thetype described. It should not be re-garded as governing any other situa-tions; for example, the interpretationdoes not deal with cases where securi-ties are being transferred to someoneother than the issuer, or to the issuerfor a purpose other than immediate re-tirement. Whether the margin require-ments are inapplicable to any such sit-uations would depend upon the rel-evant facts of actual cases presented.

[27 FR 12346, Dec. 13, 1962]


§ 220.121 Applicability of margin re-quirements to joint account be-tween two creditors.

(a) The Board has recently beenasked whether extensions of credit in ajoint account between two brokeragefirms, a member of a national securi-ties exchange (‘‘Firm X’’) and a mem-ber of the National Association of Se-curities Dealers (‘‘Firm Y’’) are subjectto the margin requirements of this part(Regulation T). It is understood thatsimilar joint accounts are not uncom-mon, and it appears that the marginrequirements of the regulation are notconsistently applied to extensions ofcredit in the accounts.

(b) When the account in question wasopened, Firm Y deposited $5,000 withFirm X and has made no further de-posit in the account, except for themonthly settlement described below.Both firms have the privilege of buyingand selling specified securities in theaccount, but it appears that Firm Xinitiates most of the transactionstherein. Trading volume may run fromhalf a million to a million dollars amonth. Firm X carries the ‘‘official’’ledger of the account and sends Firm Ya monthly statement with a completerecord of all transactions effected dur-ing the month. Settlement is then

made in accordance with the agree-ment between the two firms, whichprovides that profits and losses shall beshared equally on a fifty-fifty basis.However, all transactions are con-firmed and reconfirmed between thetwo on a daily basis.

(c) Section 220.3(a) provides that

All financial relations between a creditorand a customer, whether recorded in onerecord or in more than one record, shall beincluded in and be deemed to be part of thecustomer’s general account with the cred-itor, * * *.

and § 220.2(c) defines the term ‘‘cus-tomer’’ to include

* * * any person, or any group of personsacting jointly, * * * to or for whom a cred-itor is extending or maintaining any credit* * *

In the course of a normal month’s oper-ations, both Firm X and Firm Y are atone time or another extending credit tothe joint account, since both make pur-chases for the account that are not‘‘settled’’ until the month’s end. Con-sequently, the account would be a‘‘customer’’ within the above defini-tion.

(d) Section 220.6(b) provides, with re-spect to the account of a joint adven-ture in which a creditor participates,that

* * * the adjusted debit balance of the ac-count shall include, in addition to the itemsspecified in § 220.3(d), any amount by whichthe creditor’s contribution to the joint ad-venture exceeds the contribution which hewould have made if he had contributed mere-ly in proportion to his right to share in theprofits of the joint adventure.

In addition, the final paragraph of§ 220.2(c) states that the definition of‘‘customer’’

* * * includes any joint adventure in whicha creditor participates and which would beconsidered a customer of the creditor if thecreditor were not a participant.

(e) The above provisions clearlyevince the Board’s intent that the reg-ulation shall cover trading accounts inwhich a creditor participates. If addi-tional confirmation were needed, it issupplied by the fact that the Boardfound it needful specifically to exemptfrom ordinary margin requirements


27


credit extended to certain joint ac-counts in which a creditor participates.These include the account in whichtransactions of odd-lot dealers may befinanced under § 220.4(f) (4), and the spe-cialist’s account under § 220.4(g). Ac-cordingly, the Board concluded thatthe joint account between Firm X andFirm Y is a ‘‘customer’’ within themeaning of the regulation, and that ex-tensions of credit in the account aresubject to margin requirements.

[31 FR 7169, May 17, 1966]

§ 220.122 ‘‘Deep in the money put andcall options’’ as extensions of credit.

(a) The Board of Governors has beenasked to determine whether the busi-ness of selling instruments described as‘‘deep in the money put and call op-tions’’ would involve an extension ofcredit for the purposes of the Board’sregulations governing margin require-ments for securities transactions. Mostof such options would be of the ‘‘call’’type, such as the following proposalthat was presented to the Board for itsconsideration:

If X stock is selling at $100 per share, thecustomer would pay about $3,250 for a con-tract to purchase 100 shares of X at $70 pershare within a 30-day period. The contractwould be guaranteed by an exchange mem-ber, as are standard ‘‘puts’’ and ‘‘calls’’.When the contract is made with the cus-tomer, the seller, who will also be the writerof the contract, will immediately purchase100 shares of X at $100 per share through theguarantor member firm in a margin account.If the customer exercises the option, theshares will be delivered to him; if the optionis not exercised, the writer will sell theshares in the margin account to close outthe transaction. As a practical matter, it isanticipated that the customer will exercisethe option in almost every case.

(b) An ordinary ‘‘put’’ is an optiongiven to a person to sell to the writerof the put a specified amount of securi-ties at a stated price within a certaintime. A ‘‘call’’ is an option given to aperson to buy from the writer a speci-fied amount of securities at a statedprice within a certain time. To be free-ly saleable, options must be indorsed,or guaranteed, by a member firm of theexchange on which the security is reg-istered. The guarantor charges a fee forthis service.

(c) The option embodied in the nor-mal put or call is exercisable either atthe market price of the security at thetime the option is written, or some‘‘points away’’ from the market. Theprice of a normal option is modest bycomparison with the margin requiredto take a position. Writers of normaloptions are persons who are satisfiedwith the current price of a security,and are prepared to purchase or sell atthat price, with the small profit pro-vided by the fee. Moreover, since alarge proportion of all options arenever exercised, a person who custom-arily writes normal options can antici-pate that the fee would be clear profitin many cases, and he will not be obli-gated to buy or sell the stock in ques-tion.

(d) The stock exchanges require thatthe writer of an option deposit andmaintain in his margin account withthe indorser 30 percent of the currentmarket price in the case of a call (un-less he has a long position in the stock)and 25 percent in the case of a put (un-less he has a short position in thestock). Many indorsing firms in fact re-quire larger deposits. Under § 220.3(a) ofRegulation T, all financial relationsbetween a broker and his customermust be included in the customer’sgeneral account, unless specifically eli-gible for one of the special accountsauthorized by § 220.4. Accordingly, thewriter, as a customer of the memberfirm, must make a deposit, which is in-cluded in his general account.

(e) In order to prevent the depositfrom being available against othermargin purchases, and in effect count-ed twice, § 220.3(d)(5) requires that incomputing the customer’s adjusteddebit balance, there shall be included‘‘the amount of any margin custom-arily required by the creditor in con-nection with his endorsement or guar-antee of any put, call, or other option’’.No other margin deposit is required inconnection with a normal put or calloption under Regulation T.

(f) Turning to the ‘‘deep in themoney’’ proposed option contract de-scribed above, the price paid by thebuyer can be divided into (1) a depositof 30 percent of the current market


28

12 CFR Ch. II (1–1–00 Edition)§ 220.122

value of the stock, and (2) an addi-tional fixed charge, or fee. To the ex-tent that the price of the stock roseduring the 30 ensuing days the pro-posed instrument would produce re-sults similar to those in the case of anordinary profitable call, and the con-tract right would be exercised. Buteven if the price fell, unlike the situa-tion with a normal option, the buyerwould still be virtually certain to exer-cise his right to purchase before it ex-pired, in order to minimize his loss.The result would be that the buyerwould not have a genuine choicewhether or not to buy. Rather, the in-strument would have made it possiblefor him, in effect, to purchase stock asof the time the contract was written bydepositing 30 percent of the stock’scurrent market price.

(g) It was suggested that the pro-posed contract is not unusual, sincethere are examples of ordinary optionsselling at up to 28 percent of currentmarket value. However, such examplesare of options running for 12 months,and reflect expectations of changes inthe price of the stock over that period.The 30-day contracts discussed aboveare not comparable to such 12-monthoptions, because instances of true ex-pectations of price changes of thismagnitude over a 30-day period wouldbe exceedingly rare. And a contractthat does not reflect such true expecta-tions of price change, plus a reasonablefee for the services of the writer, is notan option in the accepted meaning ofthe term.

(h) Because of the virtual certaintythat the contract right would be exer-cised under the proposal describedabove, the writer would buy the stockin a margin account with an indorsingfirm immediately on writing the con-tract. The indorsing firm would extendcredit in the amount of 20 percent ofthe current market price of the stock,the maximum permitted by the current§ 220.8 (supplement to Regulation T).The writer would deposit the 30 percentsupplied by the buyer, and furnish theremaining 50 percent out of his ownworking capital. His account with theindorsing firm would thus be appro-priately margined.

(i) As to the buyer, however, thewriter would function as a broker. In

effect, he would purchase the stock forthe account, or use, of the buyer, onwhat might be described as a deferredpayment arrangement. Like an ordi-nary broker, the writer of the contractdescribed above would put up funds topay for the difference between theprice of securities the customer wishedto purchase and the customer’s owncontribution. His only risk would bethat the price of the securities woulddecline in excess of the customer’s con-tribution. True, he would be locked in,and could not liquidate the customer’scollateral for 30 days even if the mar-ket price should fall in excess of 30 per-cent, but the risk of such a decline isextremely slight.

(j) Like any other broker who ex-tends credit in a margin account, thewriter who was in the business of writ-ing and selling such a contract wouldbe satisfied with a fixed predeterminedamount of return on his venture, sincehe would realize only the fee charged.Unlike a writer of ordinary puts andcalls, he would not receive a substan-tial part of his income from fees onunexercised contract rights. The simi-larity of his activities to those of abroker, and the dissimilarity to a writ-er of ordinary options, would be under-scored by the fact that his fee would bea fixed predetermined amount of returnsimilar to an interest charge, ratherthan a fee arrived at individually foreach transaction according to the vola-tility of the stock and other individualconsiderations.

(k) The buyer’s general account withthe writer would in effect reflect adebit for the purchase price of thestock and, on the credit side, a depositof cash in the amount of 30 percent ofthat price, plus an extension of creditfor the remaining 70 percent, ratherthan the maximum permissible 20 per-cent.

(l) For the reasons stated above, theBoard concluded that the proposed con-tracts would involve extensions ofcredit by the writer as broker in anamount exceeding that permitted bythe current supplement to RegulationT. Accordingly, the writing of suchcontracts by a brokerage firm is pres-ently prohibited by such regulation,and any brokerage firm that endorsessuch a contract would be arranging for


29


credit in an amount greater than thefirm itself could extend, a practice thatis prohibited by § 220.7(a).

[35 FR 3280, Feb. 21, 1970]

§ 220.123 Partial delayed issue con-tracts covering nonconvertiblebonds.

(a) During recent years, it has be-come customary for portions of newissues of nonconvertible bonds and pre-ferred stocks to be sold subject to par-tial delayed issue contracts, whichhave customarily been referred to inthe industry as ‘‘delayed delivery’’ con-tracts, and the Board of Governors hasbeen asked for its views as to whethersuch transactions involve any viola-tions of the Board’s margin regula-tions.

(b) The practice of issuing a portionof a debt (or equivalent) security issueat a date subsequent to the main un-derwriting has arisen where marketconditions made it difficult or impos-sible, in a number of instances, to placean entire issue simultaneously. In in-stances of this kind, institutional in-vestors (e.g., insurance companies orpension funds) whose cash flow is suchthat they expect to have funds avail-able some months in the future, havebeen willing to subscribe to a portion,to be issued to them at a future date.The issuer has been willing to agree toissue the securities in two or morestages because it did not immediatelyneed the proceeds to be realized fromthe deferred portion, because it couldnot raise funds on better terms, or be-cause it preferred to have a certainportion of the issue taken down by aninvestor of this type.

(c) In the case of such a delayed issuecontract, the underwriter is authorizedto solicit from institutional customersoffers to purchase from the issuer, pur-suant to contracts of the kind de-scribed above, and the agreement be-comes binding at the underwriters’closing, subject to specified conditions.When securities are issued pursuant tothe agreement, the purchase price in-cludes accrued interest or dividends,and until they are issued to it, the pur-chaser does not, in the case of bonds,have rights under the trust indenture,or, in the case of preferred stocks, vot-ing rights.

(d) Securities sold pursuant to sucharrangements are high quality debtissues (or their equivalent). The pur-chasers buy with a view to investmentand do not resell or otherwise disposeof the contract prior to its completion.Delayed issue arrangements are not ac-ceptable to issuers unless a substantialportion of an issue, not less than 10percent, is involved.

(e) Sections 3(a) (13) and (14) of theSecurities Exchange Act of 1934 providethat an agreement to purchase isequivalent to a purchase, and an agree-ment to sell to a sale. The Board hashitherto expressed the view that creditis extended at the time when there is afirm agreement to extend such credit(1968 Federal Reserve Bulletin 328; 12CFR 207.101; ¶ 6800 Published Interpre-tations of the Board of Governors). Ac-cordingly, in instances of the kind de-scribed above, the issuer may be re-garded as extending credit to the insti-tutional purchaser at the time of theunderwriters’ closing, when the obliga-tions of both become fixed.

(f) Section 220.7(a) of the Board’sRegulation T (12 CFR 220.7(a)), with anexception not applicable here, forbids acreditor subject to that regulation toarrange for credit on terms on whichthe creditor could not itself extend thecredit. Sections 220.4(c) (1) and (2) (12CFR 220.4(c) (1) and (2)) provide that acreditor may not sell securities to acustomer except in good faith relianceupon an agreement that the customerwill promptly, and in no event in morethan 7 full business days, make fullcash payment for the securities. Sincethe underwriters in question are credi-tors subject to the regulation, unlesssome specific exception applies, theyare forbidden to arrange for the creditdescribed above. This result follows be-cause payment is not made until morethan 7 full business days have passedfrom the time the credit is extended.

(g) However, § 220.4(c)(3) providesthat:

If the security when so purchased is anunissued security, the period applicable tothe transaction under subparagraph (2) ofthis paragraph shall be 7 days after the dateon which the security is made available bythe issuer for delivery to purchasers.


30

12 CFR Ch. II (1–1–00 Edition)§ 220.124

(h) In interpreting § 220.4(c)(3), theBoard has stated that the purpose ofthe provision:

* * * is to recognize the fact that, when anissue of securities is to be issued at some fu-ture fixed date, a security that is part ofsuch issue can be purchased on a ‘‘when-issued’’ basis and that payment may reason-ably be delayed until after such date of issue,subject to other basic conditions for trans-actions in a special cash account. (1962 Fed-eral Reserve Bulletin 1427; 12 CFR 220.118;¶ 5996, Published Interpretations of the Boardof Governors.)

In that situation, the Board distin-guished the case of mutual fund shares,which technically are not issued untilthe certificate can be delivered by thetransfer agent. The Board held thatmutual fund shares must be regardedas issued at the time of purchase be-cause they are:

* * * essentially available upon purchaseto the same extent as outstanding securities.The mechanics of their issuance and of thedelivery of certificates are not significantlydifferent from the mechanics of transfer anddelivery of certificates for shares of out-standing securities, and the issuance of mu-tual fund shares is not a future event in thesense that would warrant the extension ofthe time for payment beyond that affordedin the case of outstanding securities. (ibid.)

The issuance of debt securities subjectto delayed issue contracts, by contrastwith that of mutual fund shares, whichare in a status of continual under-writing, is a specific single event tak-ing place at a future date fixed by theissuer with a view to its need for fundsand the availability of those fundsunder current market conditions.

(i) For the reasons stated above theBoard concluded that the nonconvert-ible debt and preferred stock subject todelayed issue contracts of the kind de-scribed above should not be regarded ashaving been issued until delivered, pur-suant to the agreement, to the institu-tional purchaser. This interpretationdoes not apply, of course, to fact situa-tions different from that described inthis section.

[36 FR 2777, Feb. 10, 1971]

§ 220.124 Installment sale of tax-shel-ter programs as ‘‘arranging’’ forcredit.

(a) The Board has been asked wheth-er the sale by brokers and dealers oftax-shelter programs containing a pro-vision that payment for the programmay be made in installments wouldconstitute ‘‘arranging’’ for credit inviolation of this part 220. For the pur-poses of this interpretation, the term‘‘tax-shelter program’’ means a pro-gram which is required to be registeredpursuant to section 5 of the SecuritiesAct of 1933 (15 U.S.C. section 77e), inwhich tax benefits, such as the abilityto deduct substantial amounts of de-preciation or oil exploration expenses,are made available to a person invest-ing in the program. The programs maytake various legal forms and can relateto a variety of industries including, butnot limited to, oil and gas explorationprograms, real estate syndications (ex-cept real estate investment trusts), cit-rus grove developments and cattle pro-grams.

(b) The most common type of tax-shelter program takes the form of alimited partnership. In the case of theprograms under consideration, the in-vestor would commit himself to pur-chase and the partnership would com-mit itself to sell the interests. The in-vestor would be entitled to the bene-fits, and become subject to the risks ofownership at the time the contract ismade, although the full purchase priceis not then required to be paid. Thebalance of the purchase price after thedownpayment usually is payable in in-stallments which range from 1 to 10years depending on the program. Thus,the partnership would be extendingcredit to the purchaser until the timewhen the latter’s contractual obliga-tion has been fulfilled and the finalpayment made.

(c) With an exception not applicablehere, § 220.7(a) of Regulation T providesthat:

A creditor [broker or dealer] may arrangefor the extension or maintenance of credit toor for any customer of such creditor by anyperson upon the same terms and conditionsas those upon which the creditor, under theprovisions of this part, may himself extend


31


or maintain such credit to such customer,but only such terms and conditions * * *

(d) In the case of credit for the pur-pose of purchasing or carrying securi-ties (purpose credit), § 220.8 of the regu-lation (the Supplement to RegulationT) does not permit any loan value to begiven securities that are not registeredon a national securities exchange, in-cluded on the Board’s OTC Margin List,or exempted by statute from the regu-lation.

(e) The courts have consistently heldinvestment programs such as those de-scribed above to be ‘‘securities’’ forpurpose of both the Securities Act of1933 and the Securities Exchange Act of1934. The courts have also held that thetwo statutes are to be construed to-gether. Tax-shelter programs, accord-ingly, are securities for purposes ofRegulation T. They also are not reg-istered on a national securities ex-change, included on the Board’s OTCMargin List, or exempted by statutefrom the regulation.

(f) Accordingly, the Board concludesthat the sale by a broker/dealer of tax-shelter programs containing a provi-sion that payment for the programmay be made in installments wouldconstitute ‘‘arranging’’ for the exten-sion of credit to purchase or carry se-curities in violation of the prohibitionsof §§ 220.7(a) and 220.8 of Regulation T.

[37 FR 6568, Mar. 31, 1972]

§ 220.125–220.126 [Reserved]

§ 220.127 Independent broker/dealersarranging credit in connection withthe sale of insurance premiumfunding programs.

(a) The Board’s September 5, 1972,clarifying amendment to § 220.4(k) setforth that creditors who arrange creditfor the acquisition of mutual fundshares and insurance are also per-mitted to sell mutual fund shares with-out insurance under the provisions ofthe special cash account. It should beunderstood, of course, that such ac-count provides a relatively short creditperiod of up to 7 business days evenwith so-called cash transactions. Thisamendment was in accordance with the

Board’s understanding in 1969, whenthe insurance premium funding provi-sions were adopted in § 220.4(k), thatfirms engaged in a general securitiesbusiness would not also be engaged inthe sale and arranging of credit in con-nection with such insurance premiumfunding programs.

(b) The 1972 amendment eliminatedfrom § 220.4(k) the requirement that, tobe eligible for the provisions of the sec-tion, a creditor had to be the issuer, ora subsidiary or affiliate of the issuer, ofprograms which combine the acquisi-tion of both mutual fund shares and in-surance. Thus the amendment permitsan independent broker/dealer to sellsuch a program and to arrange for fi-nancing in that connection. In reach-ing such decision, the Board again re-lied upon the earlier understandingthat independent broker/dealers whowould sell such programs would not beengaged in transacting a general secu-rities business.

(c) In response to a specific view re-cently expressed, the Board agrees thatunder Regulation T:

* * * a broker/dealer dealing in special in-surance premium funding products can onlyextend credit in connection with such prod-ucts or in connection with the sale of sharesof registered investment companies underthe cash accounts * * * (and) cannot engagein the general securities business or sell anysecurities other than shares * * * (in) reg-istered investment companies through a cashaccount or any other manner involving theextension of credit.

(d) There is a way, of course, as hasbeen indicated, that an independentbroker/dealer might be able to sellother than shares of registered invest-ment companies without creating anyconflict with the regulation. Such salescould be executed on a ‘‘funds on hand’’basis and in the case of payment bycheck, would have to include the col-lection of such check. It is understoodfrom industry sources, however, thatfew if any independent broker/dealersengage solely in a ‘‘fund on hand’’ typeof operation.

[38 FR 11066, May 4, 1973]


32

12 CFR Ch. II (1–1–00 Edition)§ 220.128

§ 220.128 Treatment of simultaneouslong and short positions in thesame margin account when put orcall options or combinations there-of on such stock are also out-standing in the account.

(a) The Board was recently askedwhether under Regulation T, ‘‘Creditby Brokers and Dealers’’ (12 CFR part220), if there are simultaneous long andshort positions in the same security inthe same margin account (often re-ferred to as a short sale ‘‘against thebox’’), such positions may be used tosupply the place of the deposit of mar-gin ordinarily required in connectionwith the guarantee by a creditor of aput or call option or combinationthereof on such stock.

(b) The applicable provisions of regu-lation T are § 220.3(d)(3) and (5) and§ 220.3(g)(4) and (5) which provide as fol-lows:

(d) * * * the adjusted debit balance of ageneral account * * * shall be calculated bytaking the sum of the following items:

* * * * *

(3) The current market value of any securi-ties (other than unissued securities) soldshort in the general account plus, for eachsecurity (other than an exempted security),such amount as the board shall prescribefrom time to time in § 220.8(d) (the supple-ment to regulation T) as the margin requiredfor such short sales, except that suchamount so prescribed in such § 220.8(d) neednot be included when there are held in thegeneral account * * * the same securities orsecurities exchangeable or convertible with-in 90 calendar days, without restrictionother than the payment of money, into suchsecurities sold short;

* * * * *

(5) The amount of any margin customarilyrequired by the creditor in connection withhis endorsement or guarantee of any put,call, or other option;

* * * * *

(g) * * * (4) Any transaction which servesto meet the requirements of paragraph (e) ofthis section or otherwise serves to permitany offsetting transaction in an accountshall, to that extent, be unavailable to per-mit any other transaction in such account.

(5) For the purposes of this part (regula-tion T), if a security has maximum loanvalue under paragraph (c)(1) of this sectionin a general account, or under § 220.4(j) in aspecial convertible debt security account, asale of the same security (even though notthe same certificate) in such account shallbe deemed to be a long sale and shall not bedeemed to be or treated as a short sale.

(c) Rule 431 of the New York StockExchange requires that a creditor ob-tain a minimum deposit of 25 percentof the current market value of theoptioned stock in connection with hisissuance or guarantee of a put, and atleast 30 percent in the case of a call(and that such position be ‘‘marked tothe market’’), but permits a short posi-tion in the stock to serve in lieu of therequired deposit in the case of a putand a long position to serve in the caseof a call. Thus, where the appropriateposition is held in an account, that po-sition may serve as the margin re-quired by § 220.3(d)(5).

(d) In a short sale ‘‘against the box,’’however, the customer is both long andshort the same security. He may haveestablished either position, properlymargined, prior to taking the other, orhe may have deposited fully paid secu-rities in his margin account on thesame day he makes a short sale of suchsecurities. In either case, he will havedirected his broker to borrow securitieselsewhere in order to make delivery onthe short sale rather than using hislong position for this purpose (see also17 CFR 240.3b–3).

(e) Generally speaking, a customermakes a short sale ‘‘against the box’’for tax reasons. Regulation T, however,provides in § 220.3(g) that the two posi-tions must be ‘‘netted out’’ for the pur-poses of the calculations required bythe regulation. Thus, the board con-cludes that neither position would beavailable to serve as the deposit ofmargin required in connection with theendorsement by the creditor of an op-tion.

(f) A similar conclusion obtainsunder § 220.3(d)(3). That section pro-vides, in essence, that the margin oth-erwise required in connection with ashort sale need not be included in theaccount if the customer has in the ac-count a long position in the same secu-rity. In § 220.3(g) (4), however, it is pro-vided that ‘‘[A]ny transaction which


33


1 Rule 144A, 17 CFR 230.144A, was originallypublished in the FEDERAL REGISTER at 55 FR17933, April 30, 1990.

* * * serves to permit any offsettingtransaction in an account shall, to thatextent, be unavailable to permit anyother transaction in such account.’’Thus, if a customer has, for example, along position in a security and thatlong position has been used to supplythe margin required in connection witha short sale of the same security, thenthe long position is unavailable toserve as the margin required in connec-tion with the creditor’s endorsement ofa call option on such security.

(g) A situation was also described inwhich a customer has purported to es-tablish simultaneous offsetting longand short positions by executing a‘‘cross’’ or wash sale of the security onthe same day. In this situation, nochange in the beneficial ownership ofstock has taken place. Since there isno actual ‘‘contra’’ party to eithertransaction, and no stock has been bor-rowed or delivered to accomplish theshort sale, such fictitious positionswould have no value for purposes of theBoard’s margin regulations. Indeed, theadoption of such a scheme in connec-tion with an overall strategy involvingthe issuance, endorsement, or guar-antee of put or call options or combina-tions thereof appears to be manipula-tive and may have been employed forthe purpose of circumventing the re-quirements of the regulations.

[38 FR 12098, May 9, 1973]

§§ 220.129–220.130 [Reserved]

§ 220.131 Application of the arrangingsection to broker-dealer activitiesunder SEC Rule 144A.

(a) The Board has been asked wheth-er the purchase by a broker-dealer ofdebt securities for resale in reliance onRule 144A of the Securities and Ex-change Commission (17 CFR 230.144A) 1

may be considered an arranging ofcredit permitted as an ‘‘investmentbanking service’’ under § 220.13(a) ofRegulation T.

(b) SEC Rule 144A provides a safeharbor exemption from the registrationrequirements of the Securities Act of1933 for resales of restricted securities

to qualified institutional buyers, as de-fined in the rule. In general, a qualifiedinstitutional buyer is an institutionalinvestor that in the aggregate ownsand invests on a discretionary basis atleast $100 million in securities ofissuers that are not affiliated with thebuyer. Registered broker-dealers needonly own and invest on a discretionarybasis at least $10 million of securitiesin order to purchase as principal underthe rule. Section 4(2) of the SecuritiesAct of 1933 provides an exemption fromthe registration requirements for‘‘transactions by an issuer not involv-ing any public offering.’’ Securities ac-quired in a transaction under section4(2) cannot be resold without registra-tion under the Act or an exemptiontherefrom. Rule 144A provides a safeharbor exemption for resales of suchsecurities. Accordingly, broker-dealersthat previously acted only as agents inintermediating between issuers andpurchasers of privately-placed securi-ties, due to the lack of such a safe har-bor, now may purchase privately-placed securities from issuers as prin-cipal and resell such securities to‘‘qualified institutional buyers’’ underRule 144A.

(c) The Board has consistently treat-ed the purchase of a privately-placeddebt security as an extension of creditsubject to the margin regulations. Ifthe issuer uses the proceeds to buy se-curities, the purchase of the privately-placed debt security by a creditor rep-resents an extension of ‘‘purpose cred-it’’ to the issuer. Section 7(c) of the Se-curities Exchange Act of 1934 prohibitsthe extension of purpose credit by acreditor if the credit is unsecured, se-cured by collateral other than securi-ties, or secured by any security (otherthan an exempted security) in con-travention of Federal Reserve regula-tions. If a debt security sold pursuantto Rule 144A represents purpose creditand is not properly collateralized by se-curities, the statute and Regulation Tcan be viewed as preventing thebroker-dealer from taking the securityinto inventory in spite of the fact thatthe broker-dealer intends to imme-diately resell the debt security.

(d) Under § 220.13 of Regulation T, acreditor may arrange credit it cannotitself extend if the arrangement is an


34

12 CFR Ch. II (1–1–00 Edition)§ 220.132

‘‘investment banking service’’ and thecredit does not violate Regulations Gand U. Investment banking services aredefined to include, but not be limitedto, ‘‘underwritings, private placements,and advice and other services in con-nection with exchange offers, mergers,or acquisitions, except forunderwritings that involve the publicdistribution of an equity security withinstallment or other deferred-paymentprovisions.’’ To comply with Regula-tions G and U where the proceeds ofdebt securities sold under Rule 144Amay be used to purchase or carry mar-gin stock and the debt securities aresecured in whole or in part, directly orindirectly by margin stock (see 12 CFR207.2(f), 207.112, and 221.2(g)), the mar-gin requirements of the regulationsmust be met.

(e) The SEC’s objective in adoptingRule 144A is to achieve ‘‘a more liquidand efficient institutional resale mar-ket for unregistered securities.’’ Tofurther this objective, the Board be-lieves it is appropriate for RegulationT purposes to characterize the partici-pation of broker-dealers in this uniqueand limited market as an ‘‘investmentbanking service.’’ The Board is there-fore of the view that the purchase by acreditor of debt securities for resalepursuant to SEC Rule 144A may be con-sidered an investment banking serviceunder the arranging section of Regula-tion T. The market-making activitiesof broker-dealers who hold themselvesout to other institutions as willing tobuy and sell Rule 144A securities on aregular and continuous basis may alsobe considered an arranging of creditpermissible under § 220.13(a) of Regula-tion T.

[Reg. T, 55 FR 29566, July 20, 1990]

§ 220.132 Credit to brokers and deal-ers.

For text of this interpretation, see§ 207.114 of this subchapter.

[Reg. T, 61 FR 60167, Nov. 26, 1996]

PART 221—CREDIT BY BANKS ANDPERSONS OTHER THAN BROKERSOR DEALERS FOR THE PURPOSEOF PURCHASING OR CARRYINGMARGIN STOCK (REGULATION U)

Sec.221.1 Authority, purpose, and scope.221.2 Definitions.221.3 General requirements.221.4 Employee stock option, purchase, and

ownership plans.221.5 Special purpose loans to brokers and

dealers.221.6 Exempted transactions.221.7 Supplement: Maximum loan value of

margin stock and other collateral.

INTERPRETATIONS

221.101 Determination and effect of purposeof loan.

221.102 Application to committed creditwhere funds are disbursed thereafter.

221.103 Loans to brokers or dealers.221.104 Federal credit unions.221.105 Arranging for extensions of credit to

be made by a bank.221.106 Reliance in ‘‘good faith’’ on state-

ment of purpose of loan.221.107 Arranging loan to purchase open-end

investment company shares.221.108 Effect of registration of stock subse-

quent to making of loan.221.109 Loan to open-end investment com-

pany.221.110 Questions arising under this part.221.111 Contribution to joint venture as ex-

tension of credit when the contributionis disproportionate to the contributor’sshare in the venture’s profits or losses.

221.112 Loans by bank in capacity as trust-ee.

221.113 Loan which is secured indirectly bystock.

221.114 Bank loans to purchase stock ofAmerican Telephone and Telegraph Com-pany under Employees’ Stock Plan.

221.115 Accepting a purpose statementthrough the mail without benefit of face-to-face interview.

221.116 Bank loans to replenish workingcapital used to purchase mutual fundshares.

221.117 When bank in ‘‘good faith’’ has notrelied on stock as collateral.

221.118 Bank arranging for extension ofcredit by corporation.

221.119 Applicability of plan-lender provi-sions to financing of stock options and


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